Origins of a Flat Tax - University of Denver

Denver Law Review Denver Law Review

Volume 73 Issue 2 Article 3

January 1996

Origins of a Flat Tax Origins of a Flat Tax

Steven A. Bank

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Recommended Citation Recommended Citation Steven A. Bank, Origins of a Flat Tax, 73 Denv. U. L. Rev. 329 (1996).

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ORIGINS OF A FLAT TAX

STEVEN A. BANK*

The push toward radical reform of our federal system of graduated in-come tax rates hit the political scene like a sonic boom during 1995. No lessthan eight proposals were circulated or formally submitted by members ofCongress, including plans by Senators Richard Lugar (R-Ind.) and Arlen Spec-ter (R-Pa.), which were made the centerpieces of their respective campaignsfor the Republican nomination in the 1996 presidential elections.' Further-more, presidential candidates such as former Tennessee Governor Lamar Alex-ander,2 political commentator Pat Buchanan,' Senator Bob Dole (R-Kan.),4

* Associate, Hughes & Luce, L.L.P., Dallas, Texas. B.A., University of Pennsylvania,1991; J.D., University of Chicago, 1994. This article was written in part while the author was alaw clerk for the Honorable Jesse E. Eschbach of the United States Court of Appeals for the Sev-enth Circuit. The author wishes to express thanks to Michael McConnell and Larry Lessig fortheir encouragement and comments. The views discussed herein do not necessarily represent theviews of Hughes & Luce or its clients.

1. Tax reform plans already introduced in Congress include the following: The Freedomand Fairness Restoration Act of 1995, H.R. 2060, 104th Cong., 1st Sess. (1995) (submitted byRep. Richard Armey (R-Tex.) on July 19, 1995) and its companion S. 1050, 104th Cong., 1stSess. (1995) (submitted by Richard Shelby (R-Ala.) on July 19, 1995); H.R. 1780, 104th Cong.,1st Sess. (1995) (submitted by Mark Souder (R-Ind.) on June 7, 1995) and its companion S. 488,104th Cong., 1st Sess. (1995) (submitted by Sen. Arlen Specter (R-Pa.) on Mar. 2, 1995); CraneTithe Tax Act of 1995, H.R. 214, 104th Cong., 1st Sess. (1995) (submitted by Rep. Philip Crane(R-111.) on Jan. 4, 1995) and its companion the Flat Tax Act of 1993, S. 188, 103d Cong., 1stSess. (1993) (submitted by Sen. Jesse Helms (R-N.C.) on Jan. 26, 1993); USA Tax Act of 1995,S. 722, 104th Cong., 1st Sess. (1995) (submitted by Sen. Sam Nunn (D-Ga.) on Apr. 25, 1995).See JOINT COMMrIrEE ON TAXATION, 104TH CONG., 1ST SEss., DESCRIPTION AND ANALYSIS OFPROPOSALS TO REPLACE THE FEDERAL INCOME TAX (Joint Comm. Print 1995); JOINT COMMITTEEON TAXATION, Description and Analysis of Proposals to Replace the Federal Income Tax, 82Stand. Fed. Tax Rep. (CCH) No. 29, at 30-38 (June 15, 1995).

Plans that have been announced but not yet introduced include a "flat" tax proposal byHouse Democratic Leader Richard Gephardt (D-Mo.), in which the majority of the country wouldpay a flat tax while the richest would pay graduated rates. See Lucinda Harper, Gephardt OutlinesTax-Reform Plan Cutting Deductibles, WALL ST. J., July 7, 1995, at A2. Other announced plansinclude various sales tax proposals by Senator Richard Lugar (R-Ind.), House Ways and MeansChairman Bill Archer (R-Tex.), Representative Dan Schaefer (R-Colo.), and Representative BillyTauzin (D-La.). Jonathan Peterson, Chorus Builds for Radical Remake of U.S. Tax Policy, L.A.TIMES, Apr. 6, 1995, at Al; see also Amy Kaslow, Radical Tax Reforms Gain New Attention,CHRISTIAN Sci. MONITOR, Apr. 12, 1995, at 1; Stephen Moore, Ax the Tax, NAT'L REV., Apr. 17,1995, at 38, 38.

States are also getting involved. Flat tax plans have been proposed in South Carolina, Ar-kansas, and California. Clarifying California, WALL ST. J., Dec. 6, 1995, at A18; John Heilprin,S.C. Senate Endorses Legislation for Flat Tax, POST & COURIER (Charleston, S.C.), May 18,1995, at A8; James Jefferson, Rep. Reopens Plan for Ark. Flat Tax, COM. APPEAL (Memphis,Tenn.), July 28, 1995, at BI0.

2. U.S. GOP Candidate Alexander Backs Flat Tax, REUTERS, May 12, 1995. But see RenaPederson, Clarifying the Flat Tax, DALLAS MORNING NEWS, Jan. 21, 1996, at 23 (reporting thatAlexander recently called one flat tax plan a "nutty idea").

3. Marcia Stepanek, Republicans Flat Excited About New Tax Proposals, S.F. EXAMINER,

DENVER UNIVERSITY LAW REVIEW

and publisher Malcolm S. "Steve" Forbes, Jr., as well as leaders in both theHouse and Senate,' expressed support for these proposals and their underlyingtheories during the 1996 campaign. These reform plans, advertised as revenue-neutral, suggest either replacing the current graduated income tax rate structurewith a "flat" or proportionate rate, or abolishing the income tax altogether infavor of a national consumption or sales tax. The devil, however, is in thedetails. 6 Consequently, House Majority Leader Newt Gingrich (R-Ga.) andSenate Majority Leader Bob Dole tabbed Jack Kemp to lead a GOP commis-sion to investigate the possibility of overhauling the tax system.' Regardlessof which, if any, proposal survives the political process, tax reform is sure tobe on the public agenda in 1996.

While the public has echoed the radical sentiments expressed by tax re-formers, a basic loyalty to graduated rates remains. In a Wall Street Journalpoll, two-thirds of respondents said that the current system was "unfair."8

Likewise, a Newsweek poll found that only 27% of respondents favored thecurrent system in which rates range from 15% to 39%.9 Much of this dissatis-faction, however, represents a plea for simplification rather than support forthe proposed alternatives. 0 Opinion surveys and focus groups reveal that "the

Apr. 17, 1995, at All.4. Id.5. Enthusiasm Growing for Income Tax Reform, ORLANDO SENTINEL, June 9, 1995, at A3

(discussing House Minority Leader Richard Gephardt's plan to announce his proposal); JohnHarwood, Presidential Hopeful Forbes Talks Up Flat Tax, WALL ST. J., Jan. 2, 1996, at 38; LisaHolton, The Flat Tax; What Is It? Who Gains? Will It Fly?, CHI. SuN-TIMES, Apr. 23, 1995, at41; Peterson, supra note 1, at Al; B.J. Phillips, Flat-Tax Fever, TAMPA TRIB., Apr. 29, 1995, at15. Representative Robert K. Doman (R-Cal.), a long shot Republican presidential candidate, andMassachusetts Governor William Weld, a rumored candidate, also publicly proclaimed their sup-port for the flat tax. Amy Bayer, Dornan Joins GOP Presidential Race, Vows to Fight Moral De-cay, SAN DIEGO UNION-TRIB., Apr. 14, 1995, at A6; Publisher Forbes May Seek GOP Presiden-tial Nomination, PALM BEACH POST, July 9, 1995, at A14; Doris S. Wong, Weld Backs Flat-RateU.S. Income Tax, BOSTON GLOBE, July 20, 1995, at 46.

6. See Edwin Chen, Details Divide GOP's Flat-Tax Boosters, L.A. TIMES, May 18, 1995,at A14.

7. Gerald F. Seib, Flat to Flatter Goes Tax Debate for Republicans, WALL ST. J., Apr. 12,1995, at A16. A report from the commission was released on January 17, 1996. See Cal Thomas,Flat Tax: It's a Good Alternative to Our Confusing System, DALLAS MORNING NEWS, Jan. 18,1996, at 19A. There are also reports that President Clinton has directed the National EconomicCouncil to evaluate the options for tax reform. Douglas Stanglin et al., Taxing Debate, U.S. NEWS& WORLD REP., July 10, 1995, at 14, 14.

Unfortunately, the Kemp Commission Report offered few details. Its basic prescription forreform is some type of flat rate tax which allows full deductibility of the payroll tax and requiresa two-thirds super-majority vote in Congress to increase the rate. See REPORT OF THE NATIONALCOMMISSION ON ECONOMIC GROWTH AND TAX REFORM, UNLEASHING AMERICA'S POTENTIAL(1996).

8. Ronald G. Shafer, Tax Overhaul? Yes. Flat Tax? Not So Fast, WALL ST. J., Apr. 28,1995, at A l.

9. Poll: Majority Favors Flat-Tax Proposal, WASH. TIMES, Apr. 9, 1995, at A2.10. See Keep it Simple .... INDIANAPOLIS NEWS, June 8, 1995, at A6; Make Taxes Simpler,

Not Flat, WIS. ST. J., Aug. 6, 1995, at B3; Henry G. Mogensen, All Would Gain from Tax Re-form, WIS. ST. J., Apr. 29, 1995, at A7; Time for Reform; Tortuous Tax System Needs Simplifi-cation, COLUMBUS DISPATCH, May 6, 1995, at A12; see also Sheldon D. Pollack, Tax Complexity,Reform, and the Illusion of Tax Simplification, 2 GEO. MASON INDEP. L. REv. 319 (1994) (argu-ing that most tax reform proposals claim to simplify the tax code because this makes good press,but few come close to this goal).

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long-held notion that the tax code should be 'progressive,' requiring the rich topay a higher percentage of their income in taxes than the poor ... remainsfirmly rooted in the minds of many middle-income taxpayers."" Thus, manyresist reform when they realize that it involves a significant departure from ourcurrent system of graduated rates.'

Indeed, graduated rates have become entrenched in our notion of whatconstitutes a "fair" system of taxation. It is common to hear people suggestthe somewhat oxymoronic solution of a "flat" tax which contains more thanone tax rate. 3 As popular columnist William Safire wrote, "[m]ost of us ac-cept as 'fair' this principle: The poor should pay nothing, the middlers some-thing, the rich the highest percentage."' 4 Given this "political logic of pro-gressive taxation,"' 5 Representative Sam M. Gibbons (D-Fla.), the ranking

11. Clay Chandler, Will the Republicans Trip over Tax Reform? Strategists Say a CrusadeCould Backfire, Painting GOP as Pawns of Corporations, Rich, WASH. POST, Aug. 13, 1995, atHI.

12. In several Wall Street Journal and NBC News polls, a majority of people favoredretaining graduated rates despite their eagerness for radical reform. The Flat Tax Is Losing ItsAppeal Among U.S. Voters, Poll Finds, WALL ST. J., Mar. 8, 1996, at R2 (stating that 54% sup-ported a graduated tax while only 39% preferred a flat tax); see also Christina Duff & Gerald F.Seib, Panel Shaping GOP's Tax Plan Recommends Single Low Rate, WALL ST. J., Jan. 18, 1996,at A6 (stating that 54% supported a graduated income tax system, while 41% supported a flat tax);Gerald Seib, Forbes Boomlet: A Rogue Force Stalks the Field, WALL ST. J., Dec. 6, 1995, at A20.The results in a Newsweek poll and a poll by Time and CNN, however, showed that more respon-dents favored some form of flat rate taxation. Flatter Is Better, Both Parties Agree Tax SystemToo Complicated, SAN DIEGO UNION-TRIB., July 7, 1995, at B6; Poll: Majority Favors Flat-TaxProposal, supra note 9, at A2. With the majority of plans billing themselves as "flat," while stillproviding deductions and graduated rates, the Newsweek poll and the poll by Time and CNN maybe misleading. See Reformers Really Want a Flat Tax with Wrinkles, PALM BEACH POST, July 15,1995, at A14. Many respondents may be simply unfamiliar with the choices. See Chandler, supranote 11, at HI ("Nearly seven in 10 respondents to a February CBS News/New York Times sur-vey said they had never 'heard or read anything' about the flat tax."). At a minimum, the numbersindicate substantial support for change without substantial support for moving away from graduat-ed rates.

13. See A Flat Tax That America Might Buy, Bus. WK., June 12, 1995, at 110, 110 ("Wefavor a modified flat tax that would flatten the rate structure into two or three rates and preservedeductions for home mortgage interest contributions."); Phillips, supra note 5, at 15; WilliamSafire, Flat Tax Plan, TIMES-PICAYUNE, Apr. 24, 1995, at B5 (arguing for a plan in which after a$15,000 exemption, earnings up to $150,000 would be taxed at a rate of 25% and anything overthat would be taxed at 30%); Talking Straight About Taxes, Another Debate on Tax Reform IsWelcome, but Let's Not Pretend This Will Be Easy, PLAIN DEALER, Apr. 26, 1995, at B1O [herein-after Talking Straight About Taxes].

14. Safire, supra note 13, at B5. This is a reasonable reflection of the American attitudetoward graduated rates. See Michael Kinsley, The Flat Tax Society, NEW YORKER, May 1, 1995,at 7, 8 (arguing that the wealthy should pay a disproportionate share of the taxes since they re-ceive a disproportionate share of society's benefits); Letters to the Editor, The Rich Should PayPlenty, WASH. POST, July 22, 1995, at A20.

Reaction to the Christian Coalition's endorsement of the flat tax illustrates the moral princi-ples which many believe should underlie the tax system. One commentator wrote that "[wihenyou recall that Christ's ministry was designed to uplift the poor and bring social justice to theworld, it makes you wonder why the flat tax is being called 'Christian."' Yardley Rosemar, Chris-tian Coalition's Contract: But Does Jesus Favor a Flat Tax?, NEWS & REC. (Greensboro, N.C.),May 26, 1995, at A15. A similar story is revealed by three Tennessee bishops' criticisms of salestaxes. "Tennessee takes in most of its revenue through sales taxes, and the bishops are worriedthat's too much of a burden on their poor. 'Jesus is on our side,' the clerics argue." Higher Au-thorities, WALL ST. J., June 8, 1995, at A12.

15. Should America Keep Its 'Progressive' Tax System?, INVESTOR'S Bus. DAILY, July 24,1995, at BI ("The political logic of progressive taxation has kept multiple rates in the U.S. tax

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Democrat on the House Ways and Means Committee, declared that "'[a]nynew tax system, should result in the same tax burden on each income group asthe current tax system imposes.""' 6 Thus, both the Domenici-Nunn "USAtax," which taxes income of all kinds but creates a deduction for anything aperson saves, 7 and the Gephardt "flat tax," which retains five differentrates," have been hailed because they allow for "steeply graduated marginaltax rates."' 9 According to a Washington Post editorial, the ability to tax highincomes at a higher rate than low ones "is consistent with a well-establishedAmerican tradition of fairness."2

This conception that graduated, and hence progressive, rates are inherently

fair is not confined to the popular press and political commentators. Academ-ics often uncritically accept the historical supposition that the ratification ofthe Sixteenth Amendment2' in 1913 sanctified the marriage between the prin-ciples of fairness and graduated rates and approved an explicitly redistributiverationale for the income tax.22 Akhil Amar wrote that "[tihe popular legisla-tive history of ratification [of the Sixteenth Amendment] reveals not merely anendorsement of an income tax simpliciter, but popular approval of a predict-ably progressive-that is, a redistributive-income tax."23 Because the firstpost-Sixteenth Amendment income tax included graduated rates, the assump-tion is that the progression principle was also ratified in 1913.2"

system for decades,").16. David E. Rosenbaum, Chairman Proposes Redefining Tax Code, N.Y. TIMES, June 7,

1995, at A22. Representative Gephardt's "flat" tax proposal, which provides for rates of 10%,20%, 26%, 32%, and 34%, is an example of the attempt to preserve the graduated structure. SeeHarper, supra note I, at A2.

17. David Wessel, Nunn-Domenici 'USA Tax' Puts Levy on Consumption to Encourage Sav-ing, WALL ST. J., Apr. 26, 1995, at A2.

18. Thomas Oliphant, Gephardt's Version of Flat Tax Is Fairer to Middle Class, BOSTONGLOBE, July 11, 1995, at 13.

19. Wessel, supra note 17, at A2; see Robert Kuttner, Dueling Tax Plans: One Adds Up,The Other Doesn't, BUS. WK., May 15, 1995, at 28; Tax Fairness, WASH. POST, Apr. 27, 1995, atA20; Murray Weidenbaum, Postcard-Size or Not, America Needs a New Tax Plan, CHRISTIANSci. MONITOR, May 18, 1995, at 19.

20. Tax Fairness, supra note 19, at A20. Tommy Denton, in his blunt fashion, noted that"all taxpayers should bear an equitable-and thus progressive-proportion of the burden necessaryto support the common good, including and especially the awesomely wealthy. Fair's fair."Tommy Denton, Let's Be Fair, BALTIMORE SuN, July 19, 1995, at AI5.

21. The Sixteenth Amendment states, "The Congress shall have the power to lay and collecttaxes on incomes, from whatever source derived, without apportionment among the several states,and without regard to any census or enumeration." U.S. CONST. amend. XVI.

22. See Marc Linder, I Like Ike: Bringing Back Eisenhower-Era Progressive Taxation, 67TAX NOTES 833, 834 (1995) ("Bringing back Eisenhower-era progressive taxation ... would alsofulfill the other traditional purpose of the income tax by reducing the market's increasingly un-equal distribution of income through redistribution."); Martin J. McMahon, Jr., Individual TaxReform for Fairness and Simplicity: Let Economic Growth Fend for Itself, 50 WASH. & LEE L.REV. 459, 461 (1993) ("Advocates of changing the tax system to encourage economic growth donot seem to view the tax system as a vehicle to collect adequate revenues fairly or to soften theharsh distributional results that capitalism sometimes produces."). Some recognize that this wasnot the theory enacted in 1913, but imply that it should have been. See, e.g., ROBERT STANLEY,DIMENSIONS OF LAW IN THE SERVICE OF ORDER: ORIGINS OF THE FEDERAL INCOME TAX, 1861-1913 (1993).

23. Akhil R. Amar, Comment, Our Forgotten Constitution: A Bicentennial Comment, 97YALE L.J. 281, 291-92 & n.45 (1987) (critiquing Richard Epstein's argument that redistributivelegislation offends deeply rooted Constitutional principles).

24. See Marjorie E. Kornhauser, The Rhetoric of the Anti-Progressive Income Tax Move-

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The history of income taxation in this country before and immediatelyafter the ratification of the Sixteenth Amendment, however, reveals a struggleof more than fifty years to replace a regressive tax system with a proportional,not progressive, one. Each income tax proposal was just one component of alarger tariff or revenue bill. During the three significant periods of discussionfor the income tax-1861-1872, 1893-1895, and 1909-1913-the justificationfor income taxes, and their progressive structures, was to balance out the re-gressive effects of other aspects of the federal revenue system and to requirethe wealthy to contribute their proportionate share.25 The only experimentwith a graduated income tax prior to the Sixteenth Amendment, which wasenacted to counterbalance the heavy effects of consumption taxes during theCivil War, was promptly discarded when those effects appeared to dissipate.26

When attention later became focused on the inequity of the wealthy's equalrather than proportionately larger tax contribution, an income tax enacted in1894 contained a flat rate similar in form to many of the recent proposals.27

Thus, the Sixteenth Amendment's failure to address progressive rates in itsapproval of an income tax "without apportionment among the several States,and without regard to any census or enumeration,"2 was not because progres-sion was implicit within an income tax. Indeed, a motion on the floor of Con-gress to amend the proposed Sixteenth Amendment to allow for graduatedrates was withdrawn by its sponsor, Senator Joseph W. Bailey (D-Tex.),because it would not have passed and he did not want the measure of opposi-tion recorded.29

Thus, when Congress employed graduated rates in the first post-Amend-ment income tax measure in 1913, it was not to enact a progressive overallrevenue system. These rates were politically and popularly intertwined withthe tariff reduction bill within which they were contained. Under what contem-porary economist Edwin R.A. Seligman called the "special compensatorytheory,"3 ° the Democrats who controlled the bill in both Houses supported theslightly graduated rates as a measure to equalize the overall regressive effectsof the tariffs and internal excise taxes which provided the federal governmentwith the bulk of its revenues. Operating within the patchwork quilt of federaltaxation, graduated income tax rates were seen as a temporary measure neces-sitated by inequality elsewhere in the fabric. A transition was beginning froma system which taxed people based upon their "necessity to consume" to asystem which taxed them based upon their "ability to pay." Strongly in favorof free trade, the Democrats hoped for a period when the income tax would

ment: A Typical Male Reaction, 86 MICH. L. REV. 465, 465 (1987) ("In 1913, the general public,economists, and politicians argued about the exact schedule of rates and exemptions, but the ideaof graduated or progressive rates was accepted with surprising ease and generally has remainedunquestioned ever since.") (footnote omitted).

25. See discussion infra part II.26. See discussion infra part II.B.27. See discussion infra part II.C.28. U.S. CONST. amend. XVI.29. 44 CONG. REC. 4120 (1909).30. EDWIN R.A. SELIGMAN, THE INCOME TAX: A STUDY OF THE HISTORY, THEORY AND

PRACTICE OF INCOME TAXATION AT HOME AND ABROAD 30-31 (2d ed. 1914).

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become the primary source of federal revenues. At that time, Democrats de-clared they would cast their support for the enactment of a flat rate income taxas the only just and equal form of taxation. Only the Insurgent Republicans, asmall faction of the party composed mainly of politicians from the West andMidwest, and the few members of the Progressive Party in Congress supportedthe principle that the wealthy should pay at a higher rate simply because oftheir swollen fortunes.

Despite this history, the latter view has endured. "Ability to pay" hasbecome associated with the philosopher's notion of "equality of sacrifice"rather than the politician's description of a shift from taxation measured by the"need to consume" to taxation measured by the "ability to pay"--a shift fromnear absolute equality of payment to proportional equality of payment."' Thisarticle examines the historical underpinnings and assumptions leading up to theadoption of the graduated income tax in 1913 to disclose the fallacy that Con-gress intended to enact even a mildly progressive federal revenue system.Considering the system as a whole, the Revenue Act of 1913, much like itspredecessors, was a political compromise which resulted in the adoption of aflat rate principle in federal taxation.

Section I explains the conceptual background and terminology of thefederal revenue system. The historical argument, which begins in section II,examines the short-lived income taxes enacted during the Civil War and in1894. Section III explores the political background and congressional debatessurrounding the inclusion of a graduated rate structure in the SixteenthAmendment and the Act of 1913. Finally, the article concludes that historysupports the adoption of a flat tax principle, but not in the form suggested bymany of the current proposals.

I. BACKGROUND AND TERMINOLOGY

Distributions of tax burdens can exist in a variety of manners as a per-centage of an individual's overall income. Generally, the terms proportionate,progressive, and regressive refer to these burdens.32 The proportionate tax isperhaps the easiest to understand conceptually. Each dollar of taxable incomeunder a proportionate or "flat" tax is taxed at the same rate. Thus, a personwho earns $1 must pay $.10 under a 10% flat rate system of taxation while aperson who earns $100 must pay $10, one hundred times the contribution ofthe lower-income individual. Wealthier individuals pay higher absolute

31. See McMahon, supra note 22, at 464 ("If equity in the tax rates requires an attempt toapproximate equal sacrifice or to measure 'ability to pay' across broad ranges of incomes, ratesshould be far more progressive than the current rate schedule.").

32. -Seligman described a fourth manner of apportioning the burdens of taxation called thedegressive tax, where a tax is progressive to a certain level and then proportionate thereafter.SELIGMAN, supra note 30, at 30. Of course, this describes all progressive taxation which does notdefine its upper rate by an infinite number. According to Seligman, the term "degressive taxation"is reserved for systems where a low proportional rate is seen as the normal one and lesser incomesreceive an even lower rate. Id. Perhaps because of this philosophical uncertainty or the reality ofhigh rates, this term is not often cited in popular literature on the subject. But see Komhauser,supra note 24, at 471 (using the term "degressive tax").

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amounts to the government, but not because their dollars are treated differentlythan those of other taxpayers.

In a progressive tax system, the percentage of tax paid to the governmentincreases with income. Under our current regime, this is accomplished throughgraduated marginal rates. Using the above example, the individual who earns$1 pays nothing, while those earning $50 and $100 might pay $5, or 10% ofincome, and $20, or 20%, respectively. Progressive taxation, however, can beaccomplished without graduated marginal rates. For example, a proportionaterate of taxation coupled with an exemption results in progressive taxation.33

An exemption of $1 would relieve the earner of $1 from paying any tax at all.Individuals earning $50 and $100 would pay tax on only $49 and $99 of theirrespective incomes. Since the dollar removed from the $50 earner's income isa greater percentage of his income than the dollar removed from the $100earner's income, the progressive effect is intensified. Combining a proportion-ate rate with a flat rebate or grant to all taxpayers achieves the same result.34

The regressive form of taxation has been said to be so unpopular "that theterm itself has become colored."35 Under this system, individuals pay a lowerpercentage of their incomes in taxes as they become wealthier. For this reason,the consumption taxes of the nineteenth and early twentieth centuries werethought to be regressive. This does not mean, however, that the absoluteamount paid cannot rise with income. One percent of $100 is still a higherabsolute number than 50% of $1. Thus, even under regressive rates, wealthierindividuals may contribute more to the government than lower-income taxpay-ers.

Some of the continuing loyalty to graduated rates can be attributed toconfusion over the terminology and the practical application of current propos-als. Critics disparage the flat rate tax plans for their apparent lack of progres-sion and dismiss consumption or sales tax alternatives due to their supposedlyregressive effects.36 Putting aside the normative question of what constitutesthe proper distribution of tax burdens, neither criticism is fair or accurate inlight of the proposals currently circulating.

For instance, all of the current flat tax proposals are progressive in thesense that each contains a generous exemption." Some proposals even con-

33. See WALTER J. BLUM & HARRY KALVEN, JR., THE UNEASY CASE FOR PROGRESSIVE

TAXATION 4 (1953); ROBERT E. HALL & ALVIN RABUSHKA, Low TAX, SIMPLE TAX, FLAT TAX

25 (1983).34. See Joseph Bankman & Thomas Griffith, Social Welfare and the Rate Structure: A New

Look at Progressive Taxation, 75 CAL. L. REV. 1905, 1908 (1987).35. BLUM & KALVEN, supra note 33, at 3.36. See, e.g., Edwin Chen, Administration Opposes Consumption Based Tax Plan, L.A.

TIMES, June 8, 1995, at Al 8; Dan Schaefer, Beyond Repair, Sales Tax Best 'Reform' for UnftxableIncome Tax Code, ROCKY MTN. NEWS, May 21, 1995, at A98; Talking Straight About Taxes,supra note 13, at BI0; Tax Reform Pitfalls, SACRAMENTO BEE, Apr. 27, 1995, at B6;Weidenbaum, supra note 19, at 19. As will be discussed in the conclusion, most of the flat taxplans, through their exemption of all investment income and capital gains, amount to consumptiontax plans, effectively blurring the distinction between the two.

37. See Louis S. Richman, The Flat Tax, FORTUNE, June 12, 1995, at 36. Under SenatorSpecter's plan, "Four-person households with incomes below $25,500 would pay no tax at all."Stepanek, supra note 3, at All. Under Representative Armey's plan, individuals would get a

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tain multiple rates to the extent that charitable, religious, and educational orga-nizations retain their tax exemptions. 8 Studies estimate that because of taxavoidance schemes, the present effective tax rate paid by the top 5% incomegroup is only 17.4%, rather than the nearly 40% top marginal rate imposed bystatute. 9 Thus, Representative Armey's proposal, a phased-in 17% tax rate onearned income over and above a standard deduction of $24,700 for a marriedcouple filing jointly plus an additional standard deduction of $5,000 for eachdependent, coupled with a proposed elimination of deductions, should be con-sidered no less progressive than the current system. Critics respond that certaindeductions actually promote progressivity by targeting lower-income individu-als or by encouraging income redistribution.' Senator Specter's plan to insti-tute a 20% tax rate on earned income above $16,500 plus an additional $4,500for each dependent, however, partially addresses this concern because it pre-serves the deduction for up to $100,000 of home mortgages and the deductionfor charitable contributions. 4' Flat rate proposals, therefore, are not only pro-gressive, but potentially as progressive as the current system. In effect, theexistence of a flat rate is meaningless as a measure of a proposal'sprogressivity.

42

Consumption or sales tax plans are equally undeserving of the criticismdirected toward them. Critics contend that sales taxes are regressive becausethe money paid constitutes a larger percentage of a poor person's income thanof a wealthier person's income. This logic assumes, however, that the poorand wealthy spend their money in the same way. Since we know that this isnot true, legislators could construct a sales tax as progressive as any otherform of taxation. For example, Senator Lugar's plan exempts from the taxfood and medicine and a minimum number of purchases by the poor.43 Sena-tors Nunn and Domenici go one step further in their tax plan by explicitly

personal allowance of $10,700, married joint-filers would get $21,400, and there would be anextra $5,000 deduction for each dependent child. Jackie Calmes, Flat-Tax Plan Is Revised by Rep.Armey to Reduce Projected Loss of Revenue, WALL ST. J., July 20, 1995, at A14. Thus, a familyof four earning $50,000 would pay about 6% in taxes while a family earning $200,000 would payabout 14%. Id. Professors Blum & Kalven describe this "inescapable" increment of progression as"keyed to at least a minimum subsistence standard of living," and thus discuss "whether any add-ed degree of progression" can be justified. BLUM & KALVEN, supra note 33, at 4. However, giventhe expansive exemptions proposed, with a family of four not paying taxes at all until its incomereaches $36,800, it is hard to ignore this exemption as an independent basis for progression. SeeRobert S. Stein, Is a Major Tax Overhaul Ahead?, INVESTOR'S Bus. DAILY, Apr. 13, 1995, at Al.

38. Hearings on Flat Tax Proposals Before the Senate Committee on Finance, 104th Cong.,2d Sess. (May 18, 1995) (statement of Michael J. Graetz, Professor, Yale Law School), availablein LEXIS, Nexis Library, Federal Document Clearing House Congressional Testimony, CURNWSFile [hereinafter Hearings].

39. Bradley D. Belt, Flat, Flatter, Flattest: Singing from the Same Tax 'Hymnal', CHRISTIANSC. MONITOR, May 12, 1995, at 19 (citing a recent study by Jonathan Gruber of MIT, publishedin a Progressive Policy Institute report).

40. See Holton, supra note 5, at 41.41. Gerald F. Seib, GOP Sen. Specter, Advocating Flat Tax, Religious Tolerance, Seeks

Presidency, WALL ST. J., Mar. 31, 1995, at A14.42. Cf Scott Shepard, Flat Tax Fever; 'Dream Bill' Catches Fire, Draws Flack, PALM

BEACH POST, Apr. 15, 1995, at AI0 ("I've never thought a steeply graduated tax code was pro-gressive-or even fair, for that matter. The progressivity of the (flat) tax code is in exempting thepoor from income tax rates.") (quoting Jack Kemp).

43. Stein, supra note 37, at Al.

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allowing for graduated rates ranging from 19% to 40%." A rebate or creditwhich would simulate the flat tax's exemption for a base level of consumptionmay even accompany a consumption tax.

Thus, even if one measures "fairness" by the progressivity of the tax, it isnot a function of the graduation of the rates. A flat tax can be highly progres-sive if enough people are completely exempt from paying a tax, while a grad-uated rate tax can become regressive if the bulk of the deductions favor thewealthy. A common mistake is to debate the merits of a plan based upon itsability to achieve a particular distribution of tax burdens, without consideringthe grounds for preferring that distribution. Legislators should determine howto allocate the tax burdens and then decide the simplest and most efficientmethod of accomplishing this result.

We must, therefore, evaluate the theories for deciding whether the taxsystem should be progressive, proportionate, or regressive. Philosophers andpolitical commentators have expounded on the proper distribution of tax bur-dens since taxation began. Although universally rejected by theorists, the"pseudo-democratic contention of strict dollar for dollar equality died hard," inthe minds of the public during the nineteenth century.45 Absolute equality ofpayment was inherent within poll taxes, stamp taxes, and many forms of con-sumption taxes. Philosophers, however, scoffed at the morality of this type ofdistribution. Instead, philosophers primarily discussed four theories between1861 and 1913 as bases for the distribution of the tax burdens: (1) the sacri-fice theory; (2) the benefit theory; (3) the redistributive theory; and (4) thecompensatory theory.

From the beginning, philosophers were drawn to the sacrifice theory. "Themost pronounced early support for progressive taxation, as well as '[t]he larg-est part of the intellectual history of progression theory has been the develop-ment of the sacrifice doctrine."'" John Stuart Mill, in Political Economy,stated,"'The true principle of taxation"' is that each person "'shall feel neithermore nor less inconvenience from his share of the payment than every otherperson experiences from his."' 47 Mill premised his argument upon the notionthat certain goods were necessities while others were luxuries.' Everyonefirst devoted their income to necessities until achieving a certain point of satia-tion, whereupon they could spend their remaining income on luxuries. 9 Sincetaxes are presumably drawn off the top of a person's income, a head tax takesaway from a poor person's necessities while merely cutting back a richperson's luxuries. Thus, the rich person must pay more to feel the same sacri-fice as the poor person. The difficulty with this argument is its practical im-

44. Wessel, supra note 17, at A2.45. JOHN D. BUENKER, THE INCOME TAX AND THE PROGRESSIVE ERA 8 (1985).46. Jay M. Howard, When Two Tax Theories Collide: A Look at the History and Future of

Progressive and Proportionate Personal Income Taxation, 32 WASHBURN L.J. 43, 63 (1992) (al-teration in original) (quoting Walter J. Blum & Harry Kalven Jr., The Uneasy Case for Progres-sive Taxation, 19 U. CHI. L. REV. 417, 456 (1952)).

47. STEPHEN F. WESTON, PRINCIPLES OF JUSTICE IN TAXATION 187-88 (1903) (quoting 5JOHN S. MILL, POLITICAL ECONOMY, ch. 2, § 2 (N.Y., D. Appleton & Co. 1888)).

48. Id. at 188-89.49. Id.

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plementation. As Edwin R.A. Seligman conceded, "Equality of sacrifice, in-deed, we can never attain absolutely or exactly, because of the diversity ofindividual wants and desires."5 In order to combat this difficulty, philoso-phers often translated the negative conception of "equality of sacrifice" intothe positive indicia of taxation based upon "ability to pay." Sometimes calledthe "faculty theory," one receives an exemption for income presumed neces-sary to satisfy basic individual needs." Thus, under this theory, only the"clear" income is taxed. Beyond that, the principle that "ability increases in agreater ratio than income" warrants a progressive rate. 2 While politiciansoften cited the phrase "ability to pay" to justify the transition from a consump-tion-based tax system, it did not always coincide with the philosophers' use ofthis term.53 For example, politicians often justified property taxes becausethey taxed based upon the "ability to pay,"54 yet they were more proportionalthan progressive.

The benefit theory, although sometimes scoffed at by intellectuals, hadpolitical appeal in the Gilded Age. Under the benefit theory, "[flor every'benefit' there must be a corresponding tax."55 No exemption is defensibleunder this theory, since even an individual without property needs protectionof his or her person.56 Theoretically, this suggests a proportionate tax sinceunder a fair and impartial government, the benefit of protection does not nec-essarily increase geometrically with respect to income.57 Under the politicalcircumstances of the day, when the public perceived that special laws andgovernment favors resulted in huge fortunes being amassed in large monopo-lies and heavily protected industries, the benefit theory supported at least atemporary progression in the system. Today, libertarians and free market advo-cates sometimes invoke the benefit theory because of its analogy to bargained-for consideration in a contractual exchange.

The redistributive rationale is premised on the assumption that progressionredistributes income to benefit society's welfare. This can operate in a theoret-ical or practical sense. On a theoretical level, a small increase of money in apoor person's pocket increases his or her welfare more than that same amountin a wealthy person's pocket.59 On a practical level, politicians have long

50. SELIGMAN, supra note 30, at 32. Seligman thought this problem could be overcome byrecognizing that marginal utility theory supports some level progression in the system. Id. at 32-33. This argument is not necessarily true even in the abstract. See Should America Keep Its'Progressive' Tax System?, supra note 15, at BI.

51. SELIGMAN, supra note 30, at 31.52. WESTON, supra note 47, at 241.53. Stephen Weston, a student of Seligman, who later became president of Antioch College

in Ohio, noted that many confuse the benefit and ability theories and thus advocate proportionaltaxation under the guise of the "ability to pay" concept. Id. at 226 & n.2.

54. STANLEY, supra note 22, at 25.55. WESTON, supra note 47, at 247.56. Id.57. See id. at 226.58. For a discussion of this modem development, see Komhauser, supra note 24, at 491.

Liberal scholars still invoke the traditional notion of the benefit theory to justify progressive rates.See Kinsley, supra note 14, at 8.

59. See Blum & Kalven, supra note 46, at 477 (agreeing with this intuitive notion, whileultimately rejecting a redistributive rationale for progression).

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recognized that an extreme disparity in income can lead both to excess powerand the arbitrary exercise thereof on the part of the wealthy. In turn, the poorbecome resentful and threaten radical action against a nation's basic institu-tions.' Thus, some measure of redistribution of wealth operates in a realsense to reduce that excess power, and in a symbolic sense to defuse thepoor's anger with respect to both wealth and the wealthy.6'

Modern observers have paid little attention to the fourth rationale fordistributing the benefits of taxation, the compensatory theory. Despite the wideacceptance of the compensatory theory's notion that some degree of progres-sion is necessary to compensate "for the regressivity of other taxes in ouroverall tax system," Professors Walter Blum and Harry Kalven decided toforego discussion of it, concluding that "it does not involve the adoption of theprinciple [of progression] itself."'62 But as Jerold Waltman explained, the the-ory was of central importance to early supporters of the graduated income tax:

One of the key supporting arguments for progression in income taxes,especially in the early years, was that it helped to offset the regres-sive character of other taxes, especially the customs duties. Customsduties had the double effect of taxing consumers through higherprices and enriching American manufacturers. A graduated incometax, therefore, would redress this inequity.63

Seligman called this the "special compensatory theory" to distinguish it fromthe general compensatory theory.'M General compensatory theory combinedthe redistributive and benefit rationales to reason that "'taxation ought tocounterbalance the inequalities consecrated by custom and by law ' ' '"M where-by "the legal conditions of society naturally favor the rich. ' 'T Under the spe-cial compensatory theory, one form of taxation is made progressive to counter-balance the regressive effects of another specific form of taxation. Thus,Seligman explained:

When indirect taxes exist, they often, it is said, act regressively andhit the poor harder than the rich. The direct tax, with its progressivescale, is designed to act as an engine of reparation. In order to attainequal treatment the regressive indirect taxes must be counterbalancedby the progressive direct tax.6'

Under the special compensatory theory, therefore, the graduated income taxmay be only an example of "ostensible progression," advocated by those

60. See STANLEY, supra note 22, at 234. The populist movement is an example of the viewthat the government and the rich conspire against the poor in times of great disparity causing thepoor to become desparate and threaten violence. See Barbara B. Woodhouse, Who Owns theChild?, 33 WM. & MARY L. REV. 995, 1023-24 (1992).

61. Robert Stanley argued that the income tax between 1861 and 1913 was primarily toaddress the anger of the poor. STANLEY, supra note 22, at 234.

62. BLUM & KALVEN, supra note 33, at 5 & n.10.63. JEROLD L. WALTMAN, POLITICAL ORIGINS OF THE U.S. INCOME TAX 10 (1985).64. EDWIN R.A. SELIGMAN, PROGRESSIVE TAXATION IN THEORY AND PRACTICE 146 (2d ed.

1908).65. Id. at 144 (quoting French writer Villiaumd) (citation omitted).66. Id.67. Id. at 146.

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willing to accept progression in one area in order to achieve the overall goalof proportionate taxation.' s Although not a mathematically precise counter-weight, a graduated income tax "is a crude way of accomplishing some kindof proportionality overall."69 This article argues that under the compensatorytheory the United States was striving toward the overall goal of a flat or pro-portionate tax system during the period before and immediately after theratification of the Sixteenth Amendment.

II. THE HISTORY OF INCOME TAx

A. Early Efforts at an Income Tax

Over the last fifty years, income and payroll taxes have accounted for themajority of federal revenues." This, however, was not always the case. In thenineteenth and early twentieth centuries, the United States relied on high tar-iffs and excise taxes as its principle source of revenues.7 This reliance wasso great that by the 1850s, the federal tax system was dependent on importduties for 92% of its overall revenues.72 The tariff schedules, publicly justi-fied as protection for domestic industries and privately as rewards for specialinterests,73 included manufactured goods, raw materials, consumer products,and luxury items, and covered industries in every part of the country.74 Theimport duties on food, clothing, and shelter items, however, brought in thebulk of the tariff revenues. 5 Implicit in the notion that such indirect taxesneed not be apportioned among the states was the expectation that the dutieswould be passed along to consumers in the form of higher prices.76 Given thefinite limit on an individual's ability to consume, a general understandingexisted that the poor spent a greater percentage of their incomes on suchgoods than the wealthy.77 Since domestic manufacturers were the beneficia-ries of the duties, the regressive effect was exacerbated. Although this effectmay have been minimized in some respects by the reliance on property taxes

68. Id. at 146-47.69. CHARLES 0. GALVIN & BoRis I. BITTKER, THE INCOME TAx: How PROGRESSIVE

SHOULD IT BE? 22 (1969).70. Professor Sheldon Pollack recently testified before the Senate Finance Committee that

the income tax accounted for 45% of federal receipts from all taxes in 1950, jumping to nearly73% in 1985, with a projected $739 billion in 1995. Hearings, supra note 38 (testimony ofSheldon Pollack); see SIDNEY RATNER ET AL., THE EVOLUTION OF THE AMERICAN ECONOMY 518(1979) (concluding that income and payroll taxes added up to about 70% of total tax revenues inthe late 1970s).

71. Pete V. Domenici, The UnAmerican Spirit of the Federal Income Tax, 31 HARV. J. ONLEGIS. 273, 275 (1994); Jay Starkman, Is a Consumption Tax the Answer? ATLANTA J. & CONST.,Apr. 26, 1995, at AI5. In 1914, the federal income tax accounted for a mere 9.7% of the total re-ceipts of the federal government. Hearings, supra note 38 (testimony of Sheldon Pollack).

72. STANLEY, supra note 22, at 25.73. Daniel K. Tarullo, Law and Politics in Twentieth Century Tariff History, 34 UCLA L.

REV. 285, 289-90 (1986).74. STANLEY, supra note 22, at 25-26.75. Id. at 26.76. Id. at 25. John D. Buenker concluded that "virtually the entire cost of [customs duties]

was added on to the eventual price paid by the consumer." BUENKER, supra note 45, at 31.77. BUENKER, supra note 45, at 31-32; STANLEY, supra note 22, at 26.

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at the state and local level,"8 it still energized the national debate over how toallocate the hardships of federal taxation.

Initially, the income tax was a method for reaching the pockets of peoplewho escaped taxation altogether. Legislators made the first proposal for afederal income tax toward the end of the War of 1812, after war expenditureshad produced a national debt of $100 million.7 9 When the war began, the na-tional government doubled the customs duties it had been using to raise themajority of its revenue." As the drop in trade caused these sums to dwindle,Thomas Jefferson's Secretary of the Treasury, Alexander Dallas, turned tointernal revenues from excise and property taxes, and eventually, to proposalsfor income and inheritance taxes." In light of the relative tax burdens, Dallasmay have been motivated by a desire to impose some of the costs of financingthe war on the nation's manufacturers and financiers. 2 Although the latterpush came too late to secure passage, 3 some believe the country onlyescaped income taxation "by a close margin."" Instead, Congress adopted ahigh protective tariff in 1816.5

A crude version of a state income tax already existed prior to the CivilWar. Several states imposed "faculty" taxes on income from professions,trades, and employments during the colonial period "as an adjunct to the prop-erty tax."' The advent of professions and income derived from sources otherthan real property made the property tax incomplete. "Since most colonialrevenue was derived from imposts on real and personal property, the facultytax was designed to reach 'those persons who derived their income from othersources. '87 Most states abandoned or ignored these attempts soon after theturn of the century.8 After the Panic of 1837, however, many states foundthemselves mired in financial difficulties. Presidents Andrew Jackson andMartin Van Buren had withdrawn funds from federal improvement projects, 9

78. RATNER ET AL., supra note 70, at 517.79. JOHN F. WITrE, THE POLITICS AND DEVELOPMENT OF THE FEDERAL INCOME TAX 67

(1985).80. Id.81. BUENKER, supra note 45, at 2-3; WrrrE, supra note 79, at 67. Henry Carter Adams

reported that the normal income from customs duties was about fourteen million dollars, but theactual income for the years 1812 to 1816 fell far short of this despite the doubling of rates. HEN-RY C. ADAMS, TAXATION IN THE UNITED STATES, 1789-1816, at 69 (N.Y., Burt Franklin 1884).

82. BUENKER, supra note 45, at 3.83. Id.84. RANDOLPH E. PAUL, TAXATION IN THE UNITED STATES 8 (1954).85. In the Tariff Act of April 27, 1816, the average duty was raised to 20%. BENDER'S FED-

ERAL REVENUE LAW 352 (1917); WIrrE, supra note 79, at 67. While these first duties were mod-erate by late nineteenth century standards, a twenty-year stretch of increasingly protectionist enact-ments followed. PERCY ASHLEY, MODERN TARIFF HISTORY 142 (3d ed. 1920).

86. SELIGMAN, supra note 30, at 397-99 (discussing the faculty taxes in Vermont, Connecti-cut, Rhode Island, New Hampshire, Massachusetts, South Carolina, Delaware, Maryland, andPennsylvania). John D. Buenker reported that "[a]n estimated one-third of the states partially fi-nanced the costs of the Revolutionary War through some variation of the faculty tax." BUENKER,supra note 45, at 2.

87. BUENKER, supra note 45, at 1.88. See SELIGMAN, supra note 30, at 388-400.89. Id. at 400.90. WrrrE, supra note 79, at 400 n.2.

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and efforts to have Congress assume some of the states' increasing indebted-ness were unsuccessful.9 As a result, six states turned to some form of in-come taxation.92 Not all of the push, however, should be attributed to a desireto make up for the lost revenues. Underlying many of the laws was a desire toequalize the tax burdens in the wake of the development of "paper" wealthand salaried workers.93

Two states, Pennsylvania and Maryland, attempted to raise revenue byimposing a tax on salaries and a lesser tax upon incomes and profits derivedfrom professions, faculties, and employments.94 As revenue raisers, however,the income tax was an abject failure for both states. In 1843, Pennsylvania'sincome tax raised $1,386 out of a total taxation revenue in the state of$910,000. 9" Maryland's tax fared no better, and in 1850, after collecting noincome tax in the previous year, the law was gutted of all its force.96

The four southern states which instituted a form of income tax during thatperiod (Virginia, North Carolina, Alabama, and Florida) may have had differ-ent motivations. According to Seligman, the income tax in these states waspartly "a concession to the demand for more equal taxation." '97 In some of thestates, such as Alabama, cotton factors, merchants, and the professional classeshad escaped the brunt of taxation which was borne primarily by large planta-tion owners. 98 Thus, in 1843, Alabama imposed a tax of $.25 on every $100of income from auctioneers, factors, cotton brokers, and commission bro-kers." The following year, Alabama added a tax of .5% on the incomes ofprofessionals such as lawyers, doctors, government officials, bankers, profes-sors, and employees of mercantile houses."° By contrast, North Carolina'sincome tax was primarily directed at the failure to tax so-called "unearnedincome." Passed in 1849 with a statement in the preamble that "there aremany wealthy citizens of this state who derive very considerable revenuesfrom moneys which produce interest, dividends and profits, and who do notcontribute a due proportion to the public exigencies of the same," the actimposed a 3% tax on all interest and investment income.' Virginia strad-dled the fence between these two approaches. In 1843, it imposed a tax onthree separate classes of receipts: income from employment, fees from profes-sions, and interest or profit from investment. 2 By 1853, Virginia graduatedthe tax on income and fees up to 1% on amounts over $1,000, while that

91. SELIGMAN, supra note 30, at 400.92. WITrE, supra note 79, at 400 n.2.93. STANLEY, supra note 22, at 25.94. SELIGMAN, supra note 30, at 400-01. Maryland exempted income derived from taxed

property. Id. at 401. This indicates that Maryland wanted to balance the tax burdens.95. Id. at 400.96. Id. at 401.97. Id. at 402.98. Id.99. Id. at 404.

100. Id. at 404-05. Florida's tax was quite similar to Alabama's. See id. at 405.101. Id. at 403-04. The law contained an exemption for investment income below $60 and

also imposed a $3 annual tax on all professionals after their fifth year of practice provided theirincome exceeded $500. Id. at 404.

102. Id. at 402-03.

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1996] ORIGINS OF A FLAT TAX 343

portion of the tax on investment applied to income from public securitiesclimbed from 2.5% to 3.5%."' Apparently, the experiment with graduationwas not successful or was no longer needed. Thus, in 1861 before the warbegan, Virginia replaced the graduated rate structure with a proportional tax of1% on the amount in excess of $500."'° Virginia's tax earned an appreciableamount of income during this period." 5 In general, however, most pre-CivilWar state income taxes proved to be utter failures. Inadequate administrationand lack of enforcement resulted in repeal or pitifully small revenues. Thefailure to properly administer and enforce the taxes, however, should not ob-scure the attempt to employ the income tax as a means of compensating forthe inequality in state tax burdens.

B. Civil War and Reconstruction

Despite its inauspicious beginnings in this country, Congress not onlyadopted the first federal income tax at the onset of the Civil War,"° butadopted one with explicitly graduated rates. Initially, Congress attempted togenerate revenue without resorting to an income tax. Abraham Lincoln as-sumed the presidency in March of 1861 carrying a debt of almost $75 million,which was likely to increase under the weight of the war.0 7 Salmon Chase,Lincoln's Secretary of the Treasury, proposed deficit reduction measures in-cluding a combination of Treasury notes, stepped-up sales of public lands, andincreased tariffs and excise taxes.'0 8 The House Ways and Means Committeealso prepared two bills designed to raise revenues from foreign and domesticsources."9 The first imposed duties on tea, coffee, and sugar."' The secondlevied taxes on whisky, beer, porter, carriages, promissory notes, bank bills,and imposed a license tax."' Controversy soon developed, however, becausethe impact of the bills, especially on the price of such basic commodities astea, coffee, and sugar, fell disproportionately on the poorer classes." 2 Thiseffect only exacerbated the burden on consumers who, prior to the Civil War,had borne almost the entire weight of taxation derived from customs dutiesand excise taxes." 3 Since Congress would likely cut the rates in the two

103. Id. at 403.104. Id. at 407.105. Id. at 406.106. WrrrE, supra note 79, at 67.107. Id.108. Id. On July 17 and August 5, 1861, Congress passed loan acts which empowered the

"Secretary to borrow $250 million in three-year, 7.3 per cent Treasury notes, or in twenty-yearbonds not exceeding 7 per cent." SIDNEY RATNER, TAXATION AND DEMOCRACY IN AMERICA 64(1980). Lawrence Friedman suggested that part of the initial preference for methods other thandirect taxation was the concern for encroaching on state sovereignty more than it already had.LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW 564 (2d ed. 1985).

109. RATNER, supra note 108, at 64.110. Id.Ill. Id.112. Id.113. Daniel L. Simmons, The Tax Reform Act of 1986: An Overview, 1987 B.Y.U. L. REV.

151, 152.


bills, the Ways and Means Committee decided to also submit a plan for directtaxation.' 4

On July 23, 1861, Thaddeus Stevens, the Republican chair of the Commit-tee, described as "powerful," "domineering," and "dictatorial," proposed a $30million direct tax on land, with each state's share to be apportioned by popula-tion." '5 This evoked another round of controversy. Farmers would bear thebrunt of this tax,' 6 as consumers bore the brunt of the excise taxes and cus-toms duties. Those with large holdings of stock, however, would be virtuallyexempt from taxation." 7 Thus, the House initially recommitted the bill withinstructions to amend it to include a tax on "real and personal estate." ' '

18

When the Committee was unable to accomplish this in a constitutional man-ner, the bill was again recommitted with instructions to reduce the direct taxportion and to add an income tax."' Justin S. Morrill, a Vermont Republicanand chair of the Ways and Means Subcommittee on Taxation, returned to thefloor of the House on July 29 with a new bill combining an income tax with adirect tax reduced by one-third from Stevens' original proposal. 20 Morrillargued for a tax which imposed an equality different from that imposed by theconsumption taxes or apportioned by direct taxes (which both focused onequality of payment): a tax "not upon each man an equal amount, but a taxproportionate to his ability to pay."' 2'

In the meantime, Republican Senator James F. Simmons, a Rhode Islandmanufacturer, proposed adding an income tax provision to the tariff bill whichwas passed in the House on July 18 and introduced in the Senate on July25. '22 As in the House, the impetus for the income tax was not to shift thetax burden entirely, just to distribute it more equally. Simmons attempted tominimize the impact of the increase in customs duties by discussing them inthe context of the previous forty years' rates, but the effect was still a dou-bling of the rates in just four years.'23 Thus, the income tax was designed tobalance the burden on consumption. Republican Senator William PittFessenden of Maine concurred in this decision, announcing that "I am inclinedvery much to favor the idea of a tax upon incomes for the reason that, takingboth measures together, I believe the burdens will be more equalized on all

114. RATNER, supra note 108, at 64.115. PAUL, supra note 84, at 8-9; RATNER, supra note 108, at 64; WrrrE, supra note 79, at

67.116. See RATNER, supra note 108, at 64.117. See id.118. Id.119. Id. at 64-65.120. Id. at 65; see CONG. GLOBE, 37th Cong., 1st Sess. 323 (1861) (statement of Rep.

Thomas R. Horton) (R-N.Y.).121. CONG. GLOBE, 37th Cong., 2d Sess. 1194 (1862).122. RATNER, supra note 108, at 66; see CONG. GLOBE, 37th Cong., 1st Sess. 254 (1861).123. See CONG. GLOBE, 37th Cong., 1st Sess. 254 (1861). According to Senator Simmons, the

rates during the last forty years ranged from 14.5% to 38%. Id. Thus, the proposed rate in thetariff bill of 31 7/8% did not appear so high. Id. In 1857, however, the rate was 16% on the entireschedule (taking into account both dutiable and free goods) and in the Act of 1860 the rate wasincreased to 21 7/8%. Id. The actual increase in rates was both swift and substantial.

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classes of the community, more especially on those who are able to bearthem.' 24

On July 29, 1861, both the House and Senate passed bills combining anincome tax with other revenue-raising measures.'25 The House measure pro-posed a tax of 3% on incomes above $600 while the Senate proposed a tax of5% on incomes above $1000.26 A compromise returned by the ConferenceCommittee preserved all of the changes proposed by the Senate in the tariffand direct tax rates.'27 Accompanying these measures was a 3% tax on in-comes exceeding $800, which the Committee raised to 5% on income derivedfrom property owned by United States citizens residing abroad. 2 ' Addition-ally, Congress taxed income from Treasury notes or other U.S. securities at1.5% in order to spur the purchase of war bonds.'29 Finally, Congress al-lowed a deduction for national, state, or local taxes imposed on property fromwhich income is derived. 3 ' Thus, the first income tax was essentially a flatrate tax designed to equalize the burdens imposed by the other revenue raisingmeasures with which it was passed.

Passage of a bill permitting the use of an income tax, however, did nottranslate into the actual assessment of an income tax. Chase succeeded infrustrating the bill through delay. He made no effort to assess or collect anytaxes and he made every effort to persuade Congress of the wisdom of thisstrategy. 3' This tactic would not work for long. The financial burdens of thewar were mounting by 1862.32 In January of 1862, banks throughout thecountry suspended specie payment and the government followed suit, virtuallycurtailing private and public credit.'33 Ignoring Chase's modest request that$50 million be raised through new internal taxes, Congress passed a resolutionon January 21, 1862, calling for the imposition of a tax which, when com-bined with the tariff, would raise at least $150 million. 34

In response to this congressional resolution, the House Ways and MeansCommittee submitted a bill on March 3, 1862 which provided for revenuethrough a combination of internal taxes, income taxes, and an inheritancetax. " The bill taxed incomes exceeding $600 at 3%, which was similar tothe 1861 tax except for the lowered exemption.'36 In introducing the bill,Justin Morrill stated that the provision for an income tax, though perhaps "theleast defensible," was necessary to prevent salaried workers from escaping

124. Id. at 255 (emphasis added); RATNER, supra note 108, at 66.125. WrITE, supra note 79, at 68.126. Id.127. RATNER, supra note 108, at 66-67.128. Id. at 67.129. Id.130. J.S. SEIDMAN, SEIDMAN'S LEGISLATIVE HISTORY OF FEDERAL INCOME TAX LAWS, 1938-

1861, at 1042 (1938).131. RATNER, supra note 108, at 70; Paul C. Roberts & Lawrence M. Stratton Jr., The Roots

of the Income Tax, NAT'L REV., Apr. 17, 1995, at 42.132. WRITE, supra note 79, at 68.133. RATNER, supra note 108, at 68-69.134. Id. at 69.135. Id.136. Id. at 72.

1996]


taxation altogether.'37 While the Committee was concerned about the possi-bility that the income tax would subject some forms of income to double taxa-tion, Thaddeus Stevens closed his comments by noting that

the committee thought it would be manifestly unjust to allow thelarge money operators and wealthy merchants, whose incomes mightreach hundreds of thousands of dollars, to escape from their dueproportion of the burden. They hope they have succeeded in ex-cluding from the tax the articles and subjects of gain and profit whichare taxed in another form. 38

After the bill passed the House and was sent to the Senate, 39 the SenateFinance Committee left the flat rate income tax unchanged, but struck thedirect tax provision of the bill."4 Senator Fessenden was the lone member ofthe Finance Committee to vote to retain that provision and, confessed, "I amafraid the majority against me will be about as large in the Senate as it was inthe committee."'' After the Senate voted to strike the direct tax, Simmonsproposed that the income tax rates be raised and made graduated to make upfor the lost income.42 With no objection to this amendment, Fessenden in-troduced it before the full Senate. 43 The amendment as passed by the Senateproposed a 3% tax on incomes between $600 and $10,000, a 5% tax on in-comes between $10,000 and $50,000, and a 7.5% tax on the excess over$50,000.'" A conference committee resolved the differences between theSenate and House versions by eliminating the highest rate, but preserving theprinciple of graduated rates introduced by the Senate.'45 Rather than elimi-nating the direct tax as the Senate had proposed, the Committee chose tosuspend it for two years."

Sidney Ratner suggested that the graduated income tax rate structureintroduced in the 1862 act "was not adopted for its own sake but as a byprod-uct of the increase in the rates."' 4 7 John Witte expanded upon this sentiment,stating that "progressivity was introduced not out of concern for equity, butrather to increase revenues."'" Although there was discussion of the need forrevenue, the concept of equity was underlying. When told that the final billremoved the direct tax and retained the graduated income tax rates passed inthe Senate, Representative Alexander Hamilton Rice (R-Mass.), "protest[ed]against that kind of injustice" flowing from such a "discrimination."'49 Ac-

137. CONG. GLOBE, 37th Cong., 2d Sess. 1196 (1862).138. Id. at 1577.139. Id. The margin of victory was an overwhelming 125 to 14. Id.140. RATNER, supra note 108, at 72.141. CONG. GLOBE, 37th Cong., 2d Sess. 2350 (1862).142. Id. at 2486.143. Id.144. Id.145. Id. at 2891 (statement of Rep. Thaddeus Stevens) (R-Pa.); see Act of July 1, 1862, ch.

119, 12 Stat. 432, 473, repealed by Act of June 30, 1864, ch. 172, 13 Stat. 223, 303.146. RATNER, supra note 108, at 73. Congress repealed the direct tax in 1864. Id.147. Id. at 72.148. WIrTE, supra note 79, at 69.149. CONG. GLOBE, 37th Cong., 2d Sess. 2891 (1862).

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cording to Rice, replacing the direct tax with the graduated rates exempted theproperty-owning farmers from taxation altogether, while increasing the burdenon the owners of income-producing industry. 5 Rice stated, "I am at a lossto know upon what principle of justice one class of industry should be taxedfive per cent. upon its industry and another class of industry exempted fromsuch taxation."'' Stevens responded that "we resisted the suspension of thedirect tax after the present year as long as we could without losing the bill,and I did not think it proper to lose the bill rather than suspend that directtax.

,, 152

Concluding that equity was an afterthought concedes too much and ig-nores aspects of the debates. Removal of the direct tax affected provisionsother than the income tax. Consumption taxes assumed their share of the bur-den.'53 Senator Zachariah Chandler (R-Mich.) criticized the bill because hebelieved that if it imposed a 3% tax on consumption, it should equally imposea 3% tax on income. Chandler stated:

You tax the day laborer moderately on his consumption, three percent., a very small item indeed; and you tax the man of wealth thesame way, and if you tax him in the same ratio for his income, hefeels the satisfaction of knowing that this is a reasonable burden, aburden which he ought to bear, and thus you induce men rather to en-large than to diminish their incomes under the feeling of justice,equity, and propriety.'54

Senator Simmons stood up to justify the graduated rates, explaining that "theconsumption of this country has twenty-five per cent. put on it by thisbill."'55 He continued, "[t]he poor people pay as much, and rather more, gen-erally, than rich men on their consumption."'56 Thus, he saw the graduationin the income tax as a counterbalance to equivalent rises in the tax on con-sumption. Citing the example of sugar, he stated, "We put three quarters of acent on sugar last March a year ago, and now it is two and a half cents. Thetaxes have been increased in consequence of the rebellion. I find no trouble inmy own mind in levying this income tax.""'5 Similarly, Timothy Otis Howe,the radical Republican Senator from Wisconsin,' responded to the argumentthat the agricultural sector was now exempt from taxation by pointing out that"the great amount of this revenue is to fall upon consumption, and consump-

150. Id.151. Id.152. Id.153. PAUL, supra note 84, at 10.154. CONG. GLOBE, 37th Cong., 2d Sess. 2486 (1862).155. Id.156. Id.157. Id. The price of sugar during the war was particularly volatile. The wholesale price of

sugar rose from 9 cents a pound in 1861 to 23.5 cents a pound in 1864. BUREAU OF THE CENSUS,U.S. DEP'T OF COMMERCE, HISTORICAL STATISTICS OF THE UNITED STATES: COLONIAL TIMES TO1970, pt. 1, at 209 (1975) [hereinafter HISTORICAL STATISTICS].

158. RATNER, supra note 108, at 72.

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tion is not limited to the eastern cities; it is regulated by the number of indi-viduals."'59

Adoption of the progressive principle occurred against the backdrop of theother taxes in the bill-taxes which imposed a much heavier burden on thepoorer classes. Although war expenses had increased considerably by 1864,the lower rate for income from treasury securities in the 1862 Act allowedCongress to finance much of its efforts through private creditors. 6" By 1863,due to the efforts of the Confederate navy and to the benefits of ratemanipulation, 6' Congress received ten times more income from the sale offederal securities than from tariffs. 162 Thus, when Justin Morrill reported abill to the House on April 14, 1864, which eliminated the 1862 Act's progres-sive rates and proposed a 5% tax on all incomes above $600,163 some sug-gest he was acting out of deference to the nation's wealthy private credi-tors.

64

At the same time, however, prices were rising, primarily because of theinternal revenue measures in the 1862 Act.165 In fact, prices rose an averageof 117% during the war, while money wages rose only 43%." Moreover,the proposed bill sought to double many of the internal revenue rates whileincreasing the general ad valorem tax from 3% to 5%.67 Thus, with thecompensatory rationale for graduated rates still viable, Augustus Frank, aRepublican railroad director from upstate New York, 6" proposed an amend-ment to the bill providing for a 5% tax on incomes above $600, a 7.5% tax onincomes between $10,000 and $25,000, and a 10% tax on incomes over$25,000.'" Frank argued that these graduated rates, rather than upsetting theprivate creditors, would actually please them: "the larger the tax we pay at thistime the safer we are and the better will be the securities of the Govern-ment."' 70 Frank's proposal, however, sparked a debate over the propriety ofgraduated rates.

Thaddeus Stevens, while supporting the 1862 Act's rates as a politicalcompromise, lashed out at Frank's amendment.' 7' Stevens argued:

It seems to me that it is a strange way to punish men because theyare rich. I do not know but there ought to be an indictment againstevery man who ventures to go above $600 in income .... If any

159. CONG. GLOBE, 37th Cong., 2d Sess. 2350 (1862).160. STANLEY, supra note 22, at 31.161. PAUL, supra note 84, at 11; RATNER, supra note 108, at 82.162. STANLEY, supra note 22, at 31.163. RATNER, supra note 108, at 82.164. See STANLEY, supra note 22, at 33.165. Id. The consumer price index, with a value of 100 assigned to the year 1860, rose on all

items from 101 in 1861 to 113 in 1862, and to 139 in 1863. HISTORICAL STATISTICS, supra note157, at 212.

166. ASHLEY, supra note 85, at 181.167. RATNER, supra note 108, at 82 n.9.168. Id. at 83.169. CONG. GLOBE, 38th Cong., 1st Sess. 1876 (1864).170. Id.171. See id.

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man dare go above a certain amount, more than I am worth or anyother member, then we should take it all."''

Others argued for levying a flat tax at a higher rate rather than preserving theinequality which spurred the wealthy to evade the 1862 tax and resent the wareffort.1

7 3

Several members of Congress advanced theories in favor of the graduatedrates. Representative Rufus P. Spalding (R-Ohio) invoked a form of the sacri-fice theory in favor of Frank's amendment, arguing that the $600 exemptionwould allow everyone to pay for necessities, leaving the tax to operate only onthe purchase of luxuries. 174 The sacrifice theory's weakness, however, wasexposed by Representative John A. Griswold (R-N.Y.), who asked Spalding"[are there not] a vast number of men who are richer on an income of $1,000than others who have eight or ten thousand?"' 75

Perhaps more compelling was the use of the compensatory theory. Repre-sentative Henry L. Dawes of Massachusetts 76 responded to Stevens by deny-ing that it was a punishment to ask the wealthy to pay their fair share, askingStevens whether he thought "that the poor should pay the taxes for therich?""' Iowa Republican J.B. Grinnell concurred and further proposed thatthe 10% tax be broadened to apply to incomes of $10,000.7' AlthoughGrinnell's wartime justification for the rates is sometimes used by observers todismiss the whole episode,' the principle he actually relied upon was a "pa-triotic" version of the compensatory theory. Grinnell stated:

I say, that a man who has an income of over ten thousand dollarsshould be required to live out of that income in time of war, and notbe able to lay aside more than ninety per cent. of his income and topay only ten per cent. of it to the Government, is only reasonable.They do not contribute to the Government a proportion anything likethat paid by those who are worth a less sum of money who havegone into our Army.

172. Id. For similar expressions in the House, see id. at 1877, 1940 (statements of Rep.Hubbard (R-Conn.) and Rep. Justin Morrill (R-Vt.), respectively).

173. See id. at 1876, 1877 (statements of Rep. Justin Morrill (R-Vt.) and Rep. John Griswold(D-N.Y.) with Rep. Hubbard (R-Conn.), respectively). Representative Hubbard argued that a flatrate of 8% on all incomes exceeding $600 would be preferable to a graduated system. Id. at 1877.The returns of the 1862 Act fell far short of the $85,456,000 projected by Chase, amounting in-stead to only $37,640,000. RATNER, supra note 108, at 82.

174. CONG. GLOBE, 38th Cong., 1st Sess. 1877 (1864); RATNER, supra note 108, at 84.175. CONG. GLOBE, 38th Cong., 1st Sess. 1877 (1864).176. RATNER, supra note 108, at 83.177. CONG. GLOBE, 38th Cong., 1st Sess. 1876 (1864).178. Id.179. See PAUL, supra note 84, at 714; Frank W. Hackett, The Constitutionality of the Gradu-

ated Income Tax Law, 25 YALE L.J. 428, 442 (1916); Patrick E. Hobbs, Entity Classification: TheOne Hundred-Year Debate, 44 CATH. U. L. REV. 437, 442 (1995); Roberts & Stratton, supra note131, at 38. In the debates over later income tax proposals, opponents often argued that the exigen-cy of war justified the Civil War experience. See, e.g., 50 CONG. REC. 3839 (1913) (statement ofSen. Lodge) (R-Mass.); 26 CONG. REC. 1599-1600 (statement of Rep. Ray) (R-N.Y.), 1730 (state-ment of Rep. Grosvenor) (R-Ohio), 6694 (statement of Sen. Sherman) (R-Ohio) (1894).

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... To equalize burdens and mete equal justice is the purpose ofmy amendment.'80

Although Grinnell was referring in part to consumption taxes, implicit in hisargument was that the poor's personal contribution to the defense of the Unionhad gone unmatched by many of the wealthy.' 8 ' Thus, "in view of the cer-tain tariff increases and impending direct tax debate," Frank's amendmentpassed the House and was sent to the Senate.1 2

The Senate revived the debate over graduated rates. As in the House,however, "supporters tended to portray the tax as a balance wheel in the con-text of a predominantly regressive system, while opponents located inequitiesin the income tax law itself."'' 3 Initially, Senator Fessenden announced onMay 27, 1864 that the Senate Finance Committee had modified the House bill,striking out the 10% rate and leaving it at 7.5% on all incomes exceeding$10,000.84 Republican Senator Lyman Trumbull of Illinois, while arguingthat even the highest rate should be preserved, offered this defense of progres-sion:

[B]y the terms of this bill the poor man often pays as much tax as therich man. He pays upon all the articles which he consumes. A man inthis country worth $5,000, who is living comfortably and who has anincome perhaps of six hundred or one thousand dollars a year, has asmany mouths to feed, as many members in his family to clothe andto shoe and to furnish with all the necessaries of life, as the man whohas an income of $500,000 a year; and he pays just as much tax onhis sugar and his tea and his meats and everything which he buys.That is not equal; that is, it is not according to the property of theindividual. To make this up to some extent we propose by this bill toput a tax upon income.'5

When Republican Senator John Sherman of Ohio protested that graduatedrates imposed a "different rule of taxation" on the wealthy, Trumbull asked "ifhe does not regard it as applying a different rule of taxation when the poorman pays just as high taxes on all articles he consumes under this bill as arich man."'86

Some attacked the principle of progression altogether, arguing that a flator proportionate rate even as high as 10% would be preferable to the proposed"discrimination" in the rates.'87 Senator Solomon Foot (R-Vt.) pointed out

180. CONG. GLOBE, 38th Cong., 1st Sess. 1876-77 (1864).181. For example, Garrett Davis of Kentucky, a soldier during the war, asked, "Will any gen-

tleman point to me a single millionaire or a man in the United States whose income is above$25,000 that has gone to the field?" Id. at 2515.

182. STANLEY, supra note 22, at 33.183. Id. at 34.184. CONG. GLOBE, 38th Cong., 1st Sess. 2513 (1864).185. Id.186. Id. at 2514.187. Id. (statements of Sen. Sherman (R-Ohio), Sen. Foot (R-Vt.), and Sen. Johnson (D-Md.)).

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that such a uniform rate would tax people according to their "ability topay."' 8 Foot further stated:

Under such a rule the man of large estate, having a large income,pays a larger tax or impost than the man of less estate and less tax-able income, just in the exact proportion that his assessed income islarger than that of the man of less estate. In this case the burden fallsupon the two in the exact proportion to the relative amount of theirrespective incomes. We ought to ask no more or no less.'8 9

Senator Reverdy Johnson, a moderate Democrat from Maryland explained that"the question now is not whether [a wealthy man] is to pay more income taxbecause he is rich, but whether he is to pay a great deal more by increasingthe rate by which you tax the income of the poor man."'" Thus, whileTrumbull's argument supported a proportional income tax of some kind, it didnot necessarily require a graduated one.

Radical Republican Massachusetts Senator Charles Sumner, althoughnominally aligned with Trumbull against Fessenden's proposed amendment,attempted to rebuild the case on different grounds. Sumner cited the sacrificerationale espoused by French economist J.B. Say to justify the House bill'ssteeply graduated rates.' 9' According to Sumner, Say, in reliance in part up-on the works of Adam Smith, wrote, "If a person had to pay 200f. more intaxes upon every addition of 1,000f. to his revenue, still he would multiply hisenjoyments in a larger ratio than his sacrifices."'9 2

The end result in favor of graduation, though, appeared to be reachedunder something closer to the compensatory rationale. Initially, Fessenden'samendment for lower graduated rates passed, despite Kentucky UnionistGarrett Davis' fervent support of Sumner's argument.'93 The next day,however, a proposal to levy the highest tariff rates of the war passed in theHouse."' Furthermore, during the interval in the Senate, Radical RepublicanJames W. Grimes of Iowa "succeeded in getting the Senate to suspend indefi-nitely the operation of the direct tax" slated to be collected in 1865 under theHouse bill.'95 These two developments served both to increase the burden onpoor consumers and ease the burden on wealthy landowners. It also created adefinite shortfall in the revenue bill. Thus, on June 6, 1864, the Senate re-versed gears and approved, first, an amendment by Senator James F. Wilsonof Iowa for a 7.5% tax on all incomes over $5,000 and second, an amendment

188. Id.189. Id. (statement of Sen. Foot).190. Id.191. See id. at 2514-15.192. Id. at 2515.193. See id. The amendment to the House bill was passed 22 to 15 with 12 senators absent.

Id. Sumner joined the majority, recognizing that "such a tax would probably produce comparative-ly little, and I am sure in certain quarters would be odious." Id. at 2513, 2515.

194. STANLEY, supra note 22, at 34; see CONG. GLOBE, 38th Cong., 1st Sess. 2751 (1864).The bill raised the average rate on dutiable commodities from the 37.2% level imposed in 1862 to47.02%. RATNER, supra note 108, at 88.


1996]


by Senator Grimes for a 10% tax on all incomes over $15,000.' AlthoughGrimes attributed this development to the impact made on the Senators bySumner's May 27 speech,'97 this conclusion seems doubtful given theSenate's rejection of the higher graduated rates at that time. Rather, it wasmore likely Wilson's two rationales-to make up for lost revenues and tobroaden the tax burdens-that swayed the Senate. 9 Even Grimes relied inpart upon a general compensatory rationale in responding to Missouri UnionistSenator John B. Henderson's criticism of his proposal. In this repect, Grimesstated, "If there is any class of men that the distinction ought to be made infavor of and not against it is the very class of men we have discriminatedagainst [in other ways].""' The bill was sent to the Committee of the Con-ference where it emerged with an even more steeply graduated rate of 10% onincomes above $10,000. 00

Although the 1864 Act produced the highest revenue collections fromincome taxes during the War,2°' the Treasury continued to struggle. 2 Sec-retary Chase failed to properly market the government bonds and, somewhatunexpectedly, Lincoln accepted his resignation. 3 After appointing formerSenate Finance Committee chair William Pitt Fessenden as the new TreasurySecretary, things picked up a bit.20 4 Fessenden, however, recommended in areport issued in December 1864 that more revenue was necessary to continueprosecuting the war effort. 5 Thus, on February 9, 1865, Justin Morrill intro-duced a bill to amend the 1864 Act by increasing the tax from 7.5% to 10%on incomes over $3,000. °" The House rejected Illinois Democrat Lewis W.Ross' proposal for a radically progressive income tax, which set the highestrate at 20% on incomes over $20,000. It settled instead on a moderate solutionoffered by Kentucky Unionist Robert Mallory which raised the tax to 10% onincomes over $5,000.207 With minor modifications, Congress adopted thisproposal in the final version of this amendment to the 1864 Act.20 8 The Actwas later challenged before the Supreme Court in Springer v. United

196. CONG. GLOBE, 38th Cong., 1st Sess. 2759 (1864).197. Id. at 2760.198. Id. at 2759.199. Id. at 2760.200. Act of June 30, 1864, ch. 173, 13 Stat. 223, 281 (repealed 1933); RATNER, supra note

108, at 85. A few days later, after Secretary Chase realized that an unanticipated shortfall woulddevelop over bounties promised to aid in the recruitment and retention of soldiers, Congresspassed the Emergency Income Tax Act of July 4, 1864. RATNER, supra note 108, at 89. This Actimposed a special flat income tax of 5% on all incomes over $600, assessed on income whichaccrued in 1863 and as an addition to the 1862 rates. Id.; STANLEY, supra note 22, at 35.

201. STANLEY, supra note 22, at 36.202. PAUL, supra note 84, at 14.203. Id.204. Id.205. RATNER, supra note 108, at 96.206. Id. at 97.207. Id. at 97-98.208. See Act of Mar. 3, 1865, ch. 78, 13 Stat. 469, 479; CONG. GLOBE, 38th Cong., 2d Sess.

1293 (1865).

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States,"9 but its provisions were upheld without discussing the Act's gradu-ated feature.2 '

By 1866, with the war over, the political compromise that previously hadsupported a graduated income tax began to unravel."' Although the countrywas left with an enormous debt and significant reconstruction expenses, thewar tax system as a whole became a "fearful weight."2 ' Frederick A. Pikeof Maine remarked in a House floor debate that they had received "petitionsfrom struggling manufacturers ... from all quarters of the land, asking forrelief."2 ' Political economist David Wells, the recently appointed SpecialCommissioner of the Revenue, issued a report in 1866 which found that highprices were the chief cause of postwar stagnation.2 4 Hence, Wells' reportrecommended to Treasury Secretary Hugh R. McCulloch that they lower theseprices by effecting a wholesale reduction in national taxation, beginning withinternal revenues and tariffs.2 5 The graduated income tax, although now de-rided by many, was still not ready for modification.

When Justin Morrill attempted, as he had in 1864, to introduce an incometax bill which eliminated the graduated income tax and imposed a flat 5% rateon incomes over $1,000, his measure was soundly defeated.!' 6 RepresentativePike noted that until achievement of a reduction in prices, such a measuremust wait:

Every laboring man in the country pays a tax upon what he eats,drinks, and wears. And until we come to the point of relieving thegreat body of people in the country from onerous taxes uponeveryday's consumption it is a question whether or not the men whoare able to pay should not pay this increased proportion of their in-come to the General Government.2 7

Pike instead proposed a tax of 5% on incomes exceeding $1,000 and 10% onincomes exceeding $5,000.28 Morrill, a fierce abolitionist and a founder of

the Republican Party,219 responded to this logic by invoking the mantra of

209. 102 U.S. 586 (1880).210. The Court held that the tax was more akin to a duty or an excise than a direct tax such

as property or capitation tax. Springer, 102 U.S. at 602. Thus, the tax was properly not appor-tioned. See id.

211. PAUL, supra note 84, at 23.212. Id.213. CONG. GLOBE, 39th Cong., 1st Sess. 2783 (1866). Pike was specifically referring to the

"many small and weak manufacturers of the country," who were hurt by tariffs on raw materials.Id.

214. STANLEY, supra note 22, at 44.215. Id. The wholesale price index, with a value of 100 assigned to the years 1910-14, indi-

cated a value of 193 in 1864 and 185 in 1865, after a pre-war low of 89 in 1861. HISTORICALSTATISTICS, supra note 157, at 201. Perhaps even more revealing, the Federal Reserve Bank ofNew York's cost-of-living index, with a value of 100 assigned to the year 1913, had climbed from63 in 1861, to 102 in 1865, to 103 in 1866, and to 102 in 1867. Id. at 212. Burgess's cost-of-living index revealed a similar pattern on the same scale, with a 61.2 in 1861, up to a 108.1 in1865. Id.

216. RATNER, supra note 108, at 113.217. CONG. GLOBE, 39th Cong., 1st Sess. 2783 (1866).218. RATNER, supra note 108, at 113.219. Id. at 65.

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racial equality, the subject of much attention in recent months: "In this countrywe neither create nor tolerate any distinction of rank, race, or color, andshould not tolerate anything else than entire equality in our taxation.""22 Hewent too far, however, when he compared the defense of a steeply graduatedtax proposed by Representative Ross to "the same ground that the highway-man defends his acts."22' Morrill's comparison attracted the ire of a numberof representatives,"' and although Morrill admitted that he may have ex-pressed himself "a little too strongly," he argued that because "[o]ur urgentnecessities during the war hav[e] ceased, I think we ought to relieve ourselvesat the earliest moment from such a tax." '223 Despite having allies in thisview,224 they generally misunderstood that the majority view, as opposed toRoss' radicalism, was not that the wealthy should endure an inequality, butrather that they should not receive an exemption. To the extent that an in-equality existed, it compensated for the inequality of other forms of taxationwhich resulted from the "necessities" of war and caused higher prices. Repre-sentative Ithamar C. Sloan, a Wisconsin Republican who later served as thedean of the law department at the University of Wisconsin, pointed outMorrill's inability, or lack of political desire, to see the bigger picture:

Now, throughout consideration of this bill the chairman of the Com-mittee of Ways and Means [Morrill] has resisted strenuously all prop-ositions to relieve from taxation many articles the tax upon which isoppressive and burdensome to the industry of the country. The taxupon those articles tends to depress and check the business and enter-prise of the country.225

Sidney Ratner likewise concluded, "The House majority felt that the poorerclasses bore many small but burdensome taxes which ought to be reduced orremoved before the more wealthy classes received relief."'226 After the Housepassed Pike's proposal,"' it sent the Bill to the Senate, which adopted itwithout much debate or modification. In fact, the Senate's sole modificationwas to lower the exemption to $600.22s

Because the final act declared the income tax payable every year until andincluding 1870,229 Morrill needed only to bide his time. Indeed, his argumentdid not fall upon deaf ears, for less than a year later Congress swung aroundto Morrill's position. Sensing this change, Morrill again presented, on Febru-

220. CONG. GLOBE, 39th Cong., 1st Sess. 2783 (1866).221. Id. Ross's views on the progressive income tax, largely based on a sacrifice or

redistributive rationale, were not widely shared. As in 1865, Ross proposed a graduated tax with ahigh rate of 25% on incomes in excess of $60,000. Id.

222. See id. at 2784 (statements of Rep. Spalding (R-Ohio), Rep. Sloan (R-Wis.), and Rep.Paine (R-Wis.)).

223. Id.224. See id. (statement of Rep. Price) (R-Iowa), and at 2785 (statements of Rep. Davis (R-

N.Y.) and Rep. Hale (R-N.Y.)).225. Id. at 2784.226. RATNER, supra note 108, at 113.227. CONG. GLOBE, 39th Cong., 1st Sess. 2786 (1866).228. See RATNER, supra note 108, at 114.229. Id.

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ary 13, 1867, a revenue bill to the House which proposed the imposition of aflat, rather than graduated, tax of 5% on incomes over $1,00.230 In present-ing this proposal, Morrill argued:

Few nations tolerate an income tax at all, and there is no nationwhich has any other than a uniform rate. The Treasury needs money;but on a question of taxation justice must be dealt out with an evenhand, and the rule of perfect equality should be immovable as thepoles."'

By this time, the reductions in internal taxes in 1866 and in the proposed bill,coupled with the first of many years of federal budget surpluses,232 made thegraduated income tax ripe for Morrill's attack. Thus, the House defeated, by avote of 73 to 26, Illinois Republican Representative Jehu Baker's233 proposalto amend the bill to add 10% tax on incomes over $6,000.234 As Pennsylva-nia Representative George F. Miller explained, "The tax upon incomes for thelast two years has yielded more revenue to the Government than the tax uponanything else .... [M]en [in the great cities] have made very fair and honestreturns of their incomes, and from that source has come an enormous sum forour Treasury.""2 5 The inaccuracy of Miller's statement does not detract fromits reflection of his desire to justify the end of graduation by suggesting theend of the need to compensate for regressive taxes. 236 In any event, repealingthe graduation feature while retaining the income tax itself was a recognitionof the high consumer prices. 237 As a political matter, however, and much likethe state income taxes which followed the same pattern,23 s Congress could

230. CONG. GLOBE, 39th Cong., 2d Sess. 1218 (1867).231. Id.232. See RATNER ET AL., supra note 70, at 346. The bill proposed to reduce the excise taxes

on 51 goods, including such necessaries as "clothing," "salt," and "sugar," for a total savings of$36,730,500 after some additional across-the-board cuts. CONG. GLOBE, 39th Cong., 2d Sess. 1218(1867) (statement of Rep. Morrill) (R-Vt.).

233. RATNER, supra note 108, at 115.234. CONG. GLOBE, 39th Cong., 2d Sess. 1482-83 (1867). The House also rejected two some-

what more moderate graduated income tax proposals from Rep. Ralph Hill (R-Ind.) and Rep. Pike(R-Me.). Id. at 1483.

235. Id.236. Paul reports that 1866 was indeed the income tax's greatest year in terms of revenue

production, totalling $73 million. PAUL, supra note 84, at 29. The income tax, which paid only10% of total expenditures in 1862, amounted to 25% in 1864 and 1865. Id. However, it still paledin comparison with the "$180 million in customs receipts and $236 million from other internalrevenue sources." Id. Perhaps searching for another rationale, future President James A. Garfieldof Ohio argued for a flat tax on constitutional grounds instead. CONG. GLOBE, 39th Cong., 2dSess. 1482 (1867). This rationale, unlike the compensatory theory, was openly contested. See id. at1483 (statement of Rep. Hill) (R-Ind.).

237. The Federal Reserve Bank of New York's cost-of-living index was still at 102 in 1867,but dropped to 91 in 1870. HISTORICAL STATISTICS, supra note 157, at 212.

238. Income taxes in several states, including Virginia, North Carolina, Georgia, and Texas,were graduated for a brief period during or after the Civil War. See SELIGMAN, supra note 30, at406-14. In all such cases, the rates were eventually made proportional again or the tax was aban-doned completely. See id. For example, Virginia and North Carolina both imposed a graduated taxin 1866, but the states returned to a flat tax in 1870 and 1869 respectively. See id. Seligman sug-gested that this trend occurred in the South because

[plractically none of [the southern statesl had developed the system of the general prop-erty tax as it was found in the North, and it was felt to be entirely out of the question toexpect that the burdens of the impending conflict should be bome entirely by owners of

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no longer justify the graduation in the income tax by suggesting that thewealthy were almost completely exempt from taxation.239

As 1870, the date set for the expiration of the income tax, approached,anti-income tax sentiment grew. The New York Tribune succinctly stated onFebruary 5, 1869, that "'[the [i]ncome [t]ax is the most odious, vexatious,inquisitorial, and unequal of all our taxes." 2 Congress started receiving pe-titions in opposition to the renewal of the tax in early 1870 from such diversesources as the Boards of Trade of Buffalo and Cleveland, the California legis-lature, and the Union League Club of New York City.2 4 In addition, citizensof New York City and Philadelphia organized anti-income tax associations,and papers from San Francisco, California to Erie, Pennsylvania voiced theiropposition.2 42 The advent of the first period of economic prosperity since thewar"3 added to the movement against the income tax. Wholesale prices,which had been falling in small increments each year since 1864, experienceda drop between 1869 and 1870 which was more than double the decline fromthe previous year.2" Sugar, for example, which had been 16 cents/lb. in1868 and 1869, fell to 13.5 cents/lb. in 1870.245 Wheat, which had been$2.541 a bushel in 1868, decreased to only $1.373 a bushel in 1870.2 Atthe same time, the gross national debt had been reduced by more than $300million since 1866 and the per capita debt dropped more than 18%.47 Thecontinued high taxes, coupled with the general prosperity, thus allowed thegovernment to amass budget surpluses which were used to draw down the na-tional debt.2" While public sentiment supported this for awhile, the tide hadturned so that, according to Senator John Sherman, the new slogan was "[s]toppaying the national debt and throw off taxes."249

real estate and slaves.Id. at 406.

239. This was certainly more than just a mere battle of conscience, though, as Randolph Paulnoted: the banking and manufacturing interests fought vigorously against the merchants and im-porters for the reduction of the income tax. PAUL, supra note 84, at 27. Indeed, the Radical Re-publicans won significant majorities in both houses of Congress in the 1866 elections, and theprice for some of their social causes was an alliance with the industrial sector on economic issues.RATNER, supra note 108, at 114-15. As is sometimes true, however, the political strength of alobby rises with the popular force of its position. See WrrrE, supra note 79, at 285-88. In thiscase, Congress could respond to the "plight of the wealthy" only when the war ended and theburden on the masses was lifted.

240. RATNER, supra note 108, at 122 (quoting the New York Tribune, Feb. 5, 1869).241. STANLEY, supra note 22, at 45.242. Id.243. Id. at 54.244. See HisToRIcAL STATISTICS, supra note 157, at 201.245. Id. at 209.246. Id. Of course, much of this immediate price decline was due more to the post-war policy

of monetary contraction, an attempt to make paper dollars convertible one-for-one into specieinstead of the fifty cent premium on gold over the paper dollar, rather than the reduction in con-sumption taxes. RATNER ET AL., supra note 70, at 355. This economic reality does not negate thecompensatory theory rhetoric or its vision of the understanding of equality in taxation.

247. See RATNER, supra note 108, at 123 ("The total gross debt was reduced from $2,755million in 1866 to $2,430 million in 1870, and the per capita debt was lowered from $77 in 1866to $63 in 1870.").

248. See id.249. CONG. GLOBE, 41st Cong., 2d Sess. 4714 (1870). Senator Henry W. Corbett (R-Or.),

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Despite this political and economic groundswell, an interesting alliancedeveloped to temporarily forestall the complete repeal of the income tax. Do-mestic manufacturers and agricultural producers, flush with the recent econom-ic prosperity, sought a return to explicitly protective tariffs.25 ° Thus, early in1870, the Ways and Means Committee submitted a tariff bill which madereductions almost exclusively in "purely revenue articles," while effecting asignificant increase in duties on "protected articles." '' Debate over the bill,however, was deadlocked."2 Although "the proposed tariff bill pretended" to"satisfy the pressure for reduction in taxes," it was not enough." 3 A bill wasintroduced to lower internal taxes while maintaining the income tax essentiallyat its prior level. 4 Apparently, the pro-tariff forces aligned with the pro-in-come tax forces to effectuate this move. According to Robert Stanley's studyof the roll call votes in Congress on the two issues, 94 of the 154 voting dele-gates, or two-thirds of those voting, supported both the income tax bill and thetariff bill."5 Stanley argues this refutes the progressive model that pits theurban, Northeastern Republicans against the rural agrarians on these is-sues.256 According to Stanley, this is proof of the "centrist" designs of theestablishment." 7 The results, however, are not surprising in a Congress oper-ating under notions of equality informed by the compensatory theory.

A call to reduce taxes, just as in a demand to raise them, could be accom-plished through an infinite number of variations involving excise taxes, tariffs,and income taxes. Congress was wary of tipping the scale too far in one direc-tion. Thus, Representative Austin Blair (R-Mich.) reminded Congress that"every dollar which we take off this income tax, which applies to the rich menof the country, must be laid upon the poorer men of the country. 25 ' Repre-sentative Eugene M. Wilson (D-Minn.), echoing this sentiment, argued that forevery dollar lost because the income tax was reduced, "we are prevented from

arguing a proposition with which many contemporary politicians might agree, asked:Why should we attempt to pay off the entire debt within our generation? The system ofAlexander Hamilton, to pay off a debt within the generation by which it was created,may have been wise in those days, when our income was very limited and populationsmall; but with a country increasing so rapidly in population as ours, with people com-ing from all portions of the globe, settling in the United States and taking up our publiclands, given them as a gratuity, and who will eventually, by reason of taking theselands, become comparatively wealthy, why not provide for those people paying a portionof the tax necessary to discharge the debt?

Id. at 4718.250. See STANLEY, supra note 22, at 45-46.251. RATNER, supra note 108, at 123-24. Duties often distinguished between "purely revenue

articles," for which there was no significant domestic competition and the principal reason forimposing a duty was to raise revenue, and "protected articles," which were designed to raise thecosts of a foreign good, so as to protect the domestic manufacturers of the same good from out-side competition. Id.; see also BENDER'S FEDERAL REVENUE LAW 356 (Matthew Bender & Co.,1917).

252. STANLEY, supra note 22, at 46.253. RATNER, supra note 108, at 124.254. Id.255. STANLEY, supra note 22, at 51.256. See id.257. See id. at 51-53. Stanley uses this term in a pejorative sense to describe all efforts to

preserve the status quo.258. CONG. GLOBE, 41st Cong., 2d Sess. 3994 (1870).

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seeking lower tariff duties." '259 Perhaps recognizing this zero-sum game, pro-tariff domestic manufacturers viewed the maintenance of some form of incometax as preferable to the continued existence of heavy internal duties on theirproducts.2

' This frustrated Democrat Stevenson Archer of Maryland, whodecided to oppose the income tax "[b]ecause it is to be kept up for the benefitof manufacturers and high tariff men, who control large bodies of voters,maintaining this burden in order to remove more special taxes from theirshoulders."26'

After the House passed an income tax of 3% on incomes in excess of$2,000 as a companion to the tariff bill, a similar discussion was held in theSenate. 262 Senator John Sherman of Ohio, chair of the Senate Finance Com-mittee, led the tariff/income tax alliance against the other internal tax forces.Recognizing the popular demand for a reduction of taxes, he noted, "The realquestion is, what taxes ought to be repealed [and] which among them bearmost upon the industry of our people?" 263 Sherman advocated retaining thetariff and the income tax, while Congress focused its attention on reducinginternal taxes.2

' Although the internal taxes and the customs duties both im-pacted consumption, Sherman distinguished them, arguing that the customsduties "are indirect.""26 In this respect, Sherman stated, "They are mainlyupon articles of luxury or consumption, so well distributed that the taxes fallfairly and in just proportion to ability to pay.., they are as well distributedas any taxation on consumption can be."2" He argued that because any taxon consumption "is in its nature an unequal tax," an income tax was necessaryto compensate for the unequal burden. 267 Some countered Sherman's asser-tion by noting that the income tax instituted its own inequality even with a flatrate as it contained an exemption for those earning less than $1,000.2"Sherman responded with a clear invocation of the compensatory theory's log-ic:

You may, therefore, properly exempt the great mass of the people,but solely on the ground that their tax on the articles consumed bythem is more than any income tax that could possibly be laid on therich.

Take the ordinary consumption of tea, sugar, and coffee .... Ifthe ordinary quantity of these three articles is consumed, the duty onthem alone for a man whose income is derived from his daily labor ismore than the highest income tax that has ever been levied in theUnited States; and therefore this exemption in favor of the great mass

259. Id. at 4023.260. See id. (statement of Rep. Wilson) (D-Minn.).261. Id. at 4033.262. See id. at 4063-64.263. Id. app. at 377.264. Id. app. at 377-78.265. Id. app. at 377.266. Id.267. Id. app. at 379.268. See id. at 4714 (statement of Sen. Henry Winslow Corbett) (R-Or.).

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of the people of $1,000... is exempted on the ground that theyalready, in other ways, pay a larger tax. 6

Sherman's threat to either restore the so-called "special taxes" and "grossreceipts taxes," or strike out those sections of the tariff bill which repealedrevenue tariffs if the income tax was not renewed, perhaps ultimately per-suaded some members of Congress. Thus, pro-tariff and anti-special tax forcescompromised with income tax supporters to retain the income tax, albeit at thelow rate of 2% and with a short lifespan of only two years.27'

Despite this minor setback, income tax opponents continued their attemptto repeal the tax during the years 1871 and 1872. They voiced the criticismswhich had been circulating for a decade: It was inquisitorial because it invad-ed a man's private finances; it encouraged perjury; it was a war tax which hadoutlived its usefulness; it was too expensive to collect; it was unnecessarybecause of surpluses; it was unconstitutional because it was unapportioned;and it was discriminatory and unequal. 2 Income tax supporters attempted todemonstrate that these criticisms could be levied on any form of tax, but to noavail. As John Rice of Kentucky admitted, "[T]he question of revenue reformand reduction of taxation is engrossing more of the attention of the peoplethan any other with which this Congress has to deal. ' 273 This time, however,the argument that the popular clamor was for a reduction in consumptiontaxes, not a reduction in income taxes, went unheeded.274

The economy further improved during the early 1870s. The business fail-ure rate dropped to between one-quarter and one-third of its rate during thepanic year of 1857 and stood at its lowest point until after World War 1.7As a consequence, budget surpluses remained high. In fact, from 1870 to1872, the surpluses were around $100 million, five times higher than the high-est antebellum figure in 1836.276 With prices on noncompeting goods contin-uing their free-fall,277 the pressure to equalize the burdens of the regressiveconsumption taxes no longer carried much weight. Sherman felt that thesedays of giddy prosperity would soon pass, at which time the public wouldagain demand a compensatory income tax:

It will not do to say that each person consumes in proportion to hismeans. This is not true. Every one must see that the consumption ofthe rich does not bear the same relation to the consumption of thepoor as the income of the one does to the wages of the other.

269. Id.270. Id. at 4716.271. RATNER, supra note 108, at 126-27.272. See, e.g., CONG. GLOBE, 42d Cong., 2d Sess. 1735 (1872) (statement of Rep. Rice) (D-

Ky.) (cataloging the criticisms of income tax opponents); CONG. GLOBE, 41st Cong., 3d Sess. 720(1871) (statement of Sen. John Scott) (R-Pa.).

273. CONG. GLOBE, 42d Cong., 2d Sess. 1734 (1872).274. See id. at 1737.275. STANLEY, supra note 22, at 54.276. STANLEY, supra note 22, at 284 n.105 (citing HISTORICAL STATISTIcs, supra note 157, at

Series Y 254-57).277. See id. at 201. The consumer price index dropped from 141 in 1870 to 135 in 1872. Id.

at 212.

1996]


As wealth accumulates, this injustice in the fundamental basis ofour system will be felt and forced upon the attention of Congress.Then an income tax, carefully adjusted, with proper discriminationsbetween income from property and income from personal services,and freed from the espionage of our present law, will become a partof our system.27

Certainly, generous "contributions" to political campaigns during the 1872campaign, later exposed in the Credit Mobilier scandal, helped grease theskids on the income tax's exit.279 But these elements, just as the argumentsagainst the income tax, were present before. The conditions under which theincome tax was allowed to expire are what is significant. During the politicalcampaign, pro-tariff supporters secured a "consumer-oriented" tariff bill whichfurther reduced revenue tariffs and even dropped protective tariffs 10%, lead-ing to the campaign promise of a "free breakfast table.""s Coupled with thefalling prices and rising wages, Congress perceived (or at least hoped that thepublic perceived) that it no longer needed to balance out the regressive effectsof the tariff and other consumption taxes. While this may not have been pre-cisely true, it illustrates that the income tax, and its graduation, was a functionof the need to portray a flat or proportionate distribution of overall tax bur-dens, not a progressive one. Some radical supporters of the income tax wantedto equalize incomes rather than just rates. Some opponents failed to compre-hend how the income tax compensated for the regressive consumption taxes.On balance, however, the graduated income tax during the Civil War andReconstruction was viewed as part of a flat-tax based revenue scheme."'When the obscene inequity of the exclusive reliance on tariff taxes becameless noticeable, the system appeared to be flat once again and the need for theincome tax as a counterweight had passed.

C. The Income Tax of 1894

The income tax issue continued to simmer during the 1870s and1880s,"2 but a number of influences converged to make it a reality in 1894.

278. CONG. GLOBE, 42d Cong., 2d Sess. 1708 (1872).279. RATNER, supra note 108, at 135.280. Id.; STANLEY, supra note 22, at 55; see also BENDER'S FEDERAL REvENUE LAW, supra

note 85, at 356 ("Duties were removed from revenue producers, and political influences growingout of the war were able to maintain the high protective policy."). One author noted:

Whilst apparently a concession to Free Trade, the new Act really strengthened the posi-tion of Protection; its authors had gratified the general desire for a reduction of taxation,but they had done this particularly in regard to internal duties and what may be called'breakfast-table taxes'; and consequently, as in 1870, they had made the country stillmore dependent for Federal revenue upon the purely protective duties.

ASHLEY, supra note 85, at 188.281. Indeed, the income tax was not unique as a compensatory tool. Sherman pointed out,

"During the war, these [customs) duties were increased to counterbalance the internal taxes leviedupon domestic industry." CONG. GLOBE, 42d Cong., 2d Sess. 1709 (1872).

282. WIrE, supra note 79, at 70. Fourteen different income tax bills were introduced intoCongress between 1873 and 1879. FRIEDMAN, supra note 108, at 565. Tennessee RepresentativeBenton McMillin introduced bills to reinstitute an income tax from 1879 through the early 1890s.

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1996] ORIGINS OF A FLAT TAX 361

Great fortunes were amassed during the high prosperity and high protectionismof the 1880s." 3 This focused attention back to the inequities of the tariff sys-tem during the election of Democrat and former President Grover Cleveland in1892.84 Coupled with popular unrest and economic dislocation engenderedby the panic and depression of 1893,25 conditions justified another attemptat an income tax. Although the income tax adopted rested upon compensatorytheory, the tax itself was flat, rather than graduated.286

The high protective tariffs enacted at the end of Reconstruction essentiallyremained intact through the beginning of the 1890s.287 The sustained periodof economic growth during the 1880s strengthened this practice, which wasjustified on the ground that it benefitted industry and raised wages.288 Notonly did this prosperity create annual surpluses of over $100 million, 29 but italso permitted the cost-of-living to remain relatively low during the period.2'The tariff began to show signs of weakness, however, during the 1888 electioncampaign. Grover Cleveland, searching for an issue to galvanize supportersafter an uninspiring first term, broke with precedent and concentrated solely onthe tariff issue in his State of the Union address of December 6, 1887.29! Inan attempt to appeal both to farmers desiring to sell in free markets abroadand manufacturers looking to buy cheaper supplies, Cleveland called for gen-eral reductions in the protective tariff and free raw materials.292 According toCleveland's biographer Allan Nevins, the speech, which newspapers through-out the country reprinted, "'was read as no Presidential messages sinceLincoln's had been.' 293 Frank Taussig, a noted historian of the tariff, com-mented that Cleveland's message made the tariff question "more distinctly aparty matter than it had been at any time since the Civil War." '294 AlthoughCleveland eventually lost his re-election bid to Republican Benjamin Harrisonin 1888,295 the tariff question did not fade from the political scene. In 1890,the Republicans secured passage of the McKinley Tariff Act, "an out and outprotective measure" designed as a monument to the "American System" ofindustrial development based upon strong protectionism. 29

RATNER, supra note 108, at 172.283. WITrE, supra note 79, at 70.284. Id.285. Id.286. FRIEDMAN, supra note 108, at 565.287. See BENDER'S FEDERAL REVENUE LAW, supra note 85, at 356; RATNER ET AL., supra

note 70, at 389.288. SELIGMAN, supra note 30, at 493.289. WITrE, supra note 79, at 70.290. HISToRICAL STATISTICS, supra note 157, at 212.291. SPEECHES OF THE AMERICAN PRESIDENTS 263 (Janet Podell & Steven Anzovin eds.,

1988); STANLEY, supra note 22, at 110.292. STANLEY, supra note 22, at 110. For a discussion of the farmer's shifting interest in the

tariff, see SELIGMAN, supra note 30, at 494.293. SPEECHES OF THE AMERICAN PRESIDENTS, supra note 291, at 263.

294. F.W. TAUSSIG, THE TARIFF HISTORY OF THE UNITED STATES 253 (8th ed. 1967). Ac-cording to Percy Ashley, Cleveland "declared uncompromisingly in favour of a very considerablereduction of duties." ASHLEY, supra note 85, at 196.

295. STANLEY, supra note 22, at 110.296. BENDER'S FEDERAL REVENUE LAW, supra note 85, at 356. The phrase, "American Sys-

tem," was popularized by Henry Clay in the first half of the nineteenth century. JOHN K.


With passage of the McKinley Act, the Republicans erected a lightningrod for a storm of protest against the advantages of accumulated wealth. Dur-ing the late 1880s and early 1890s, Populism spread as a principally agrarianpolitical entity geared toward "restor[ing] the economic individualism, thepolitical democracy, and the morality of personal responsibility that existed inearlier America." '297 The movement was not an assault against the accumula-tion of wealth per se, but against the improper advantages assumed by thewealthy. Similar concerns had prompted the passage of the Interstate Com-merce Act in 1887, which prohibited railway price-fixing, and the ShermanAnti-Trust Act in 1890, which declared contracts and combinations in restraintof trade illegal.298 For the farmer, however, the very real consequences of thesteady decline in agricultural prices after the Civil War overshadowed thesebroad concerns.2 The wholesale price index for farm products fell from 133in 1867 to 71 in 1890."o The farmers themselves attributed this decline toissues of monetary policy,3"' although they felt that the protectionist tariffexacerbated their plight. In fact, the farmers had initially supported protection-ism as a boon to their success in domestic markets, but increasingly saw it asinconsistent with American agriculture's movement into the export market:farmers bought supplies and goods in a protected market while selling in apredominantly free market. When coupled with their belief that the tariff bene-fitted the manufacturers who were propping up the gold standard on WallStreet, the McKinley Tariff Act was an unwelcome sight." 2

Given this hostility, President Harrison was on the defensive during hisfirst State of the Union address after the passage of the McKinley Act, claim-ing objections to the Act were based upon "misinformation."3 °3 The Demo-

GALBRAITH, ECONOMICS IN PERSPECTIVE: A CRITICAL HISTORY 157 (1987).297. Marjorie E. Kornhauser, The Morality of Money: American Attitudes Toward Wealth and

the Income Tax, 70 IND. L.J. 119, 136 (1994). For a general discussion of the Populist movement,see LAWRENCE GOODWYN, DEMOCRATIC PROMISE: THE PoPULIST MOMENT IN AMERICA (1976).

298. GALBRAITH, supra note 296, at 161-62. Railroads were particularly subject to criticismfor their facilitation of the growth of wealth. See Hobbs, supra note 179, at 442-43. Families suchas the Goulds and Vanderbilts amassed part of their fortunes as a result of this industry. Id. Thisentire movement was also intimately connected to the push for tariff reform, since many viewedthe tariff as protecting trusts from competition. See Marjorie E. Kornhauser, Corporate Regulationand the Origins of the Corporate Income Tax, 66 IND. L.J. 53, 75 n.82 (1990).

299. See RATNER ET AL., supra note 70, at 267.300. Id.301. Id.; SELIGMAN, supra note 30, at 494. The principal difficulty, according to the Populists,

was the long-held notion that paper dollars must be supported by some underlying specie such asgold or silver. See RATNER ET AL., supra note 70, at 353. Price fluctuations in those commodities,rather than the decision of a central government body such as the Federal Reserve Board today,regulated the money supply and the value of money itself. See id. As a response to this perceivedproblem, farmers helped create the "Greenback" party, referring to the color of paper notes issuedduring the Civil War which were not backed by specie. See GOODWYN, supra note 297, at 11.Democrats, including William Jennings Bryan, sought a change from the de facto gold standard toallow silver coinage or at least a truly bimetallic standard because of the greater quantity of thelatter mineral. Id. at 439-42; see also RATNER ET AL., supra note 70, at 358-61. Advocacy of thesilver standard helped propel the Democrats to victory in 1892. SELIGMAN, supra note 30, at 495.

302. See SELIGMAN, supra note 30, at 494.303. Benjamin Harrison (Dec. 3, 1889), in 2 THE STATE OF THE UNION MESSAGES OF THE

PRESIDENTS, 1790-1966, at 1668 (Fred L. Israel ed., 1967) [hereinafter UNION MESSAGES].

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cratic victory in 1892, returning Cleveland to the White House, was seen bymany as a mandate for tariff reform." 4

Soon after Cleveland's election, the country was thrown into anotherpanic, sparked by the failure of a major railroad company and a drop in theTreasury's gold reserves in April 1893.305 The ensuing depression was "oneof the longest and most severe in history. ' ' 3 6 Gross national product dropped10% and unemployment rates were as high as 20% with four millionjobless. 37 Deflation in the agricultural sector intensified, and farms fore-closed at rates as high as 75% in some western counties. 3

'a The 1890 trea-sury surplus of $105 million became a deficit of $70 million in 1894, due inpart to the increase in government spending on aid and public works pro-grams.' These efforts, however, were insufficient. Labor strife, which hadbecome more prominent during the late 1880s and early 1890s, intensified intone and force."' During the spring and summer of 1894, violence eruptedin Pennsylvania, Buffalo, and Cleveland, and culminated in the Pullman strikeof June and July 1894. This strike in turn led to a series of bloody confronta-tions between workers and law enforcement officials.3" ' "Coxey's Army," aband of destitute and discontented citizens led by Populist Jacob Coxey ofOhio, symbolized the tension of the times. The "Army," seeking work reliefand demanding inflationary monetary policy, took over the grass outside theCapitol building in Washington D.C.3 2

With this inauspicious beginning to his presidency, Cleveland set out tomake good on his promise for tariff reform.3 3 During the fall of 1893, theHouse Ways and Means Committee began to explore the issue. Representative

304. ASHLEY, supra note 85, at 213 ("The causes of the change in public opinion are not veryclear; the new tariff had not been sufficiently long in force for any definite opinion to be formedas to its effects; but no one could allege that the issue had not been clearly set before the coun-try."); PAUL, supra note 84, at 34; PAUL C. ROBERTS, NAT'L REV., Apr. 17, 1995, at 9;SELIGMAN, supra note 30, at 495. In Harrison's State of the Union message after his defeat, heconceded, "The result of the recent election must be accepted as having introduced a new policy.We must assume that the present tariff, constructed upon the lines of protection, is to be repealedand that there is to be substituted for it a tariff law constructed solely with reference to revenue

.. " Benjamin Harrison (Dec. 6, 1892), in 2 UNION MESSAGES, supra note 303, at 1711-12.305. RATNER El AL., supra note 70, at 360-61; STANLEY, supra note 22, at Ill n.22.306. STANLEY, supra note 22, at 111.307. Id.; Barbara B. Woodhouse, "Who Owns the Child?": Meyer and Pierce and the Child

As Property, 33 WM. & MARY L. REV. 995, 1024 n.123 (1992).308. STANLEY, supra note 22, at 111; Woodhouse, supra note 307, at 1024 n.123.309. BUENKER, supra note 45, at 24. Private relief efforts were, of course, significant. During

the winter of 1893-94, relief referrals increased by 50% over the previous year. "In Chicago threetimes as much cash relief was distributed." STANLEY, supra note 22, at 111.

310. Some of the more infamous incidents of labor unrest occurring after the Civil War in-cluded the July 1877 national railroad strikes, the May 1886 strike and Haymarket riot in Chicago,and the 1892 Homestead, Pennsylvania iron and steel strike at the Carnegie Steel Works. RATNERET AL., supra note 70, at 317; Gilbert C. Fite, Election of 1896, in THE COMING TO POWER 225,227 (Arthur Schlesinger ed., 1971).

311. RATNER ET AL., supra note 70, at 317; Fite, supra note 310, at 227; Woodhouse, supranote 307, at 1024 n.120.

312. Fite, supra note 310, at 227; Woodhouse, supra note 307, at 1024.313. Democratic Senator Patrick Walsh of Georgia later declared that the Wilson Tariff Bill

was "the partial fulfilment [sic] of the contest inaugurated by President Cleveland in his tariff-reform message to Congress in 1887." 26 CONG. REC. 5381 (1894).

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William Jennings Bryan, a Populist leader from Nebraska, approached Chair-man William L. Wilson (D-W.V.) with the possibility of attaching an incometax provision to the tariff bill. The income tax had become popular with farm-ers in Nebraska and elsewhere who were heavily burdened by a real propertytax which effectively exempted wealthy professionals and investors." 4 Astudy which found that the federal system of indirect taxes claimed 70% to90% of the poor's income, while taking only 3% to 10% of the wealthy'sincome, also influenced Bryan."5 To correct these inequities Bryan sought toinclude an income tax with the proposed tariff reductions." 6

Wilson, who was initially receptive to Bryan's idea, appointed TennesseeDemocrat Benton McMillin to chair the Internal Revenue Subcommittee re-sponsible for overseeing the income tax.3 However, after receiving Bryan'sproposal, which imposed a graduated tax on all incomes in excess of $2,500,Wilson and the Cleveland administration argued for separating the income taxmeasures from tariff reform so as not to jeopardize the latter."' The Decem-ber 1893 report of Treasury Secretary John G. Carlisle, outlining theAdministration's position, called for free raw materials, reduced rates on ne-cessities, and only a small tax on "legacies and successions."3 9 On Decem-ber 4, 1893, Cleveland reiterated this position in his first State of the Union

314. SELIGMAN, supra note 30, at 495. Lawrence Friedman came to a similar conclusion:It was hard enough to assess land and houses fairly; at least real estate was visible, andthere were records of title. Chattels were easy to hide, and intangibles most furtive ofall. The general property tax essentially reduced itself to a tax on land and buildings. Arich taxpayer could easily evade taxes on invisible assets.

FRIEDMAN, supra note 108, at 567. Seligman argued that this failure of the general property tax tobalance out the regressive effects of national consumption taxes, spurred the income tax move-ment:

In theory the system of state and local taxation is calculated to reach the respectiveabilities of the property-owners; but in practice, as has repeatedly been pointed out, thegeneral property tax has broken down completely; and, especially so far as personalproperty is concerned, the wealthier classes stand from under. Everywhere we meet thegrowing complaint that great wealth does not bear its share of the public burden. If,then, the tariff, as it actually exists, imposes too large a share of the burden on the ex-penditure of the poorer classes, and if the state and local revenue systems do not suc-ceed in reaching the abilities of the more well-to-do classes, the argument becomesexceedingly strong in favor of some form of tax which will redress the inequality.

It is this argument which, as we have seen, was really at the bottom of the move-ment for the income tax in 1894 ....

SELIGMAN, supra note 30, at 640.315. Louis W. KOENIG, BRYAN: A POLITIcAL BIOGRAPHY OF WILLIAM JENNINGS BRYAN

130 (1971). This study is most likely the one performed by Thomas G. Shearman entitled, "TheOwners of Wealth," in FORUM, Nov. 1889, at 262-73. See BUENKER, supra note 45, at 32.

316. STANLEY, supra note 22, at 113.317. KOENIG, supra note 315, at 130; STANLEY, supra note 22, at 113; see also RATNER,

supra note 108, at 172. Ratner suggests that Bryan may have been inspired to move for an incometax by a May 8, 1893 letter from a friend, C.H. Jones, editor of the St. Louis Republic, advocatinga graduated income tax as "the most effective weapon for use against the Plutocratic policy." Id.The letter goes on, however, to suggest the need to increase revenues to pay Civil War pensionsthrough some other method than tariffs or internal revenue measures. Id. at 173; STANLEY, supranote 22, at 113 n.29. This implies a rationale closer to compensatory than redistributive.

318. RATNER, supra note 108, at 173; STANLEY, supra note 22, at 113.319. STANLEY, supra note 22, at 112.

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message, adding only "a small tax upon incomes derived from certain corpo-rate investments. 3 0

Without mentioning an income tax, Wilson introduced the tariff bill to theHouse on January 8, 1894. Nonetheless, Bryan and McMillin, who convened aDemocratic caucus to appeal the decision of the Ways and Means Committee,managed to secure approval to introduce an income tax amendment.32

Wilson, in turn, set out to make the tax more palatable, and negotiated withBryan and McMillin for removal of the tax's graduated feature.322 On Janu-ary 29, 1894, McMillin introduced an income tax amendment to Wilson'stariff bill which proposed a 2% tax on all incomes in excess of $4,000.323

The resulting debate over income tax had a different tenor than during theCivil War. Although the tax was still based on the compensatory theory, thedebate was directed more toward the lack of contribution from the wealthyand less toward the undue burden on the poor. For example, RepresentativeMcMillin noted that, while Congress had abandoned the income tax after theCivil War, tariff taxation "has gone steadily on, increasing from day to dayand from year to year. 3 24 The nearly $8 per day raised from every man,woman, and child in the United States to support the government comes "al-most exclusively from consumption." '325 Thus, according to McMillin,"[w]ant, not wealth, pays the taxes. 326

Democrats blamed the pro-tariff forces' "bait and switch" tactics duringReconstruction for this inequity. Representative John J. McDannold (D-Ill.), inproclaiming his support for an income tax, cried,

[w]e removed the tax upon the strictly revenue articles of coffee andtea under the shallow cry of a 'free breakfast table,' while we in-creased the tax upon the table itself, the cloth which covered it, theplates, the cups, the spoons, the knives and forks, the napkins, andeverything that went to make up that 'untaxed breakfast table.'323

As McMillin explained, "There is $500,000 in the hands of one man that isnot taxed any more than the $20,000 in the hands of the other. Is this right? Isthis justice?""32 The general sentiment of the pro-income tax forces was thatthe system of tariff taxation had allowed the wealthy to escape their fair shareof taxation.329 To the prolonged applause of the House, McMillin announced:

320. Grover Cleveland, in 2 UNION MESSAGES, supra note 303, at 1761.321. KOENIG, supra note 315, at 130-31; PAUL, supra note 84, at 34; RATNER, supra note

108, at 172-73; STANLEY, supra note 22, at 114-15; see SELIGMAN, supra note 30, at 496-97.322. KOENIG, supra note 315, at 132.323. 26 CONG. REC. 1594 (1894); id. app. at 411-13 (Jan. 29, 1894) (statement of Rep.

Benton McMillin) (D-Tenn.).324. Id. app. at 413.325. Id.326. id.327. Id. at 1617.328. Id. app. at 415.329. See id. app. at 413 (Rep. McMillin); id. at 1609 (Rep. Osee Hall) (D-Minn.); id. at 1616

(Rep. John J. McDannold) (D-111.); id. at 1617-18, 1620 (Rep. John Sharp Williams) (D-Miss.); id.at 1656 (Rep. William Jennings Bryan) (Populist-Neb.); id. at 1664 (Rep. John Davis) (Populist-Kan.); id. at 1731 (Rep. Hernando de Soto Money) (D-Miss.); id. at 1733 (Rep. Constantine B.Kilgore) (D-Tex.); id. at 1755 (Rep. Edward Lane) (D-ll.).

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"I would be the most reluctant to use the power of government to tax wealthunjustly. But I am also unwilling to let wealth escape all governmental taxa-tion. '

The inequity of the tariff system seemed self-evident to a society inundat-ed with evidence as to the accumulation of wealth. "'[T]he publication of listsof millionaires was becoming a new journalistic sport.' Significantly, both theliberal Democratic New York World, published by Joseph Pulitzer, and theconservative Republican New York Tribune published lists of millionaires inthe 1890s, complete with the sources of their incomes."33' Many members ofCongress were keenly aware of this concentration of wealth. Populist SenatorWilliam Allen of Nebraska read into the Congressional Record a list of NewYork millionaires and their annual untaxed income.332 William Jennings Bry-an quoted an essay by a member of the Census Department which concludedthat 9% of the families owned 71% of the wealth.333 South Carolina Repre-sentative William Talbert quoted Senator Daniel Voorhees' 1890 estimate thatcapitalists owned over 80% of the wealth.334 The recounting of one tale toldby Voorhees made clear the implications of this concentration of wealth:"When darkness settled over Egypt and she lost her place among the greatnations of the earth, 3 per cent of her population owned 97 per cent of herwealth. When Babylon went down, 2 per cent of her population owned all thewealth. 333

Income tax supporters portrayed the exclusive reliance on a consumptiontax as a cause of this concentration of wealth. In this respect, McMillin stated:"The taxes having continually increased upon consumption, and no corre-sponding increase having been placed upon accumulation, we see such colos-sal fortunes amassed as were never concentrated in any other age or in anyother country of the world. '33 6 Representative Uriel S. Hall of Missouri, be-lieved by some to be the father of the income tax, 3

17 demonstrated the tariff

tax's twofold benefit to the rich in a real-world context:[T]here was in 1889 $63,000,000, or about $1 per capita, taken fromthe consumers of wool and woolen goods, cotton and cotton goods,and iron and steel goods for the purpose of revenue for the United

330. Id. app. at 413.331. BUENKER, supra note 45, at 28.332. 26 CONG. REC. 6712 (1894). The incomes ranged from $1.75 million for Louis C. Tif-

fany to $7.6 million for John D. Rockefeller. Id.333. Id. at 1657. George Holmes, a member of the Census Department, published an article

entitled, "The Concentration of Wealth," in the December 1893 edition of the Political ScienceQuarterly which demonstrated the vast accumulations of wealth in the few and suggested that pro-gressive income taxation be used to keep the concentration to a minimum. RATNER, supra note108, at 189-90. The methods and results of such studies are open to criticism. See Michael Novak,The Inequality Myth: What Wealth Gap?, WALL ST. J., July 11, 1995, at A16. Holmes's conclu-sion that 9% of the population owned 71% of the wealth can be favorably compared with thestrongest recent estimate that 1% of the population owns 40% of the wealth in America today. Id.(citing Keith Bradsher, Gap in Wealth in U.S. Called Widest in West, N.Y. TIMES, Apr. 13, 1995).

334. 26 CONG. REC. 1674 (1894).335. Id.336. Id. app. at 415.337. PAUL, supra note 84, at 37; Kornhauser, supra note 297, at 139 n.85 (citing ROY G.

BLAKEY & GLADYS C. BLAKEY, THE FEDERAL INCOME TAx 15 n.22 (1940)).

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States Government by the tariff tax. I believe that it will be safe tosay that in order to secure this revenue of $63,000,000 that it cost thepeople of the United States $450,000,000, the balance, $387,000,000,being paid as a bounty by the people to the monopoly manufacturingestablishments under this protective tariff system. In other words, forevery dollar placed in the Treasury of the United States there was $7put in the pockets of the protected manufacturers on account of thetariff tax ....338

What riled supporters of the income tax the most, however, was that thewealthy were unwilling to temper their greed and pay a proportionate share ofthe tax burden. Democrat John Sharp Williams of Mississippi, a consistentsupporter of the income tax from 1894 through 1913, exclaimed that,

[t]hese tax-fattened paupers, the owners of the industries which cannot stand alone, the industries which the charity of the nation (bytheir own claim at any rate, true or false) maintains and sustains,these men grown rich by taxing all consumers for their private bene-fit, have the unparalleled audacity to object to being themselves taxedfor the public benefit.339

Opponents responded that the income tax was a tax upon thrift, not uponunfair accumulation. 4" Moreover, they claimed that the wealthy as a groupwere not opposed to the measure. W. Bourne Cockran, a Tammany Democratand unofficial spokesman for the wealthy,34' reported that,

no word of opposition to this measure ... has ever been expressedby any rich man in the United States. On the contrary, I know thatsome of the wealthiest men in this country support it. I know that Mr.Gould in an interview favored it, and I am told by the gentlemanfrom Missouri that Mr. Carnegie favors it.342

338. 26 CONG. REC. 1612 (1894).339. Id. at 1620.340. See id. app. at 467 (Rep. W. Bourne Cockran) (D-N.Y.); id. at 1599-1600 (Rep. George

Washington Ray) (R-N.Y.); id. at 1650 (Rep. Joseph H. Walker) (R-Mass.); id. app. at 207 (Rep.Robert Adams, Jr.) (R-Pa.). Cockran responded to the adherents of the benefit theory that "[tlhis isnot a tax upon the men who have enjoyed any special benefit from the Government; it is a taxupon the men who have made the best use of the benefits which are common to all." Id. app. at465.

341. The Tammany political machine in New York responded to the wishes of wealthy NewYork merchants and importers who favored low tariffs, but opposed taxes on the profits fromthose tariffs. RATNER, supra note 108, at 178. At the same time, the movement professed concemfor the plight of the poor. STANLEY, supra note 22, at 118.

342. 26 CONG. REC. app. 465 (1894). Cockran was responding to a flap created when WardMcAllister, the self-proclaimed leader of a group of wealthy individuals known as the "Four Hun-dred," wrote a letter to the New York World on January 7, 1894, in which he and the groupthreatened to leave the country if a 2% income tax was imposed. Bryan issued the famous retort,"I have never known [a man] so mean that I would be willing to say of him that his patriotismwas less than two per cent deep. [Laughter and applause]." Id. at 1658.

It is quite ironic that, according to one investment analyst, a Japanese entrepreneur recentlyremarked that he would be tempted to relocate to the United States if current efforts to adopt a flattax are successful. See Sam Nakagama, Flat Tax Would Attract Foreign Investment and Spur theDollar, EcONOMIC PERSPECTIVES, July 21, 1995, at 2. The crucial difference in attitude is proba-bly attributable to the fact that present efforts suggest the possibility that investment income willbe completely exempt from taxation. By contrast, tax reform in 1894 was designed to bring in-

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The actions of the rich, however, belied Cockran's statements. According toHall, the doors to the Ways and Means Committee had been "almost battereddown by representatives of the manufacturing interests of the country...[b]ecause they know that their wealth comes from taxation. 343

Rather than seeking a redistribution of wealth, supporters sought an in-come tax that was designed, like a "handmaid of tariff reform," to compensatefor the tariff's regressive effects.3" The first step was to recognize that theproposed bill utilized a variety of methods of taxation to reach a variety ofclasses of people. Thus, Bryan pointed out the fatal mistake made by Repre-sentative Cockran in his speech:

You who listened to his speech would have thought that the incometax was the only Federal tax proposed; you would have supposed thatit was the object of this bill to collect the entire revenue from anincome tax. The gentleman forgets that the pending tariff bill willcollect upon imports more than one hundred and twenty millions ofdollars-nearly ten times as much as we propose to collect from theindividual income tax. Everybody knows that a tax upon consumptionis an unequal tax, and that the poor man by means of it pays far outof proportion to the income which he enjoys.3"5

Supporters of the income tax intended that it only "supplement" 3 the tarifftax so as to "put some little of the burden on the wealth of this country.""According to McMillin, "that system which gathers the taxes from divers[e]sources and which places some of its burdens upon every form of wealth, nottaxing any unjustly, will be considered in the end the fairest and most just thatcan be devised by our people."3 Likewise, Uriel Hall noted that, if Con-gress rejected the income tax, it would be declaring its willingness to lay theburdens of the tariff upon the poor, but not "to lay a feather's weight upon thegreat wealth of this country .... an argument in favor of demagogery andsocialism, without righteousness for its warp and woof, and it will come backand curse us in the future." 3 9

vestment income within the realm of taxation when it previously had gone untaxed. See 26 CoNG.REC. 3397 (1894) (statement of Indiana Senator Daniel Voorhees, who introduced the bill in theSenate, on the theory that a propensity exists for income arising from the wealthy man's bondsand other investments to escape taxation altogether).

343. 26 CONG. REC. 1611 (1894).344. Id. app. at 183 (Rep. Andrew J. Hunter) (D-Ill.) (quoting the Honorable Scott Wike).345. Id. at 1656.346. Id. app. at 415.347. Id. at 1610.348. Id. app. at 415.349. ld. at 1609. Stanley suggests that this and other statements by Hall indicate that income

tax supporters were motivated by a desire to acquiesce to the masses and thus avoid radicalchange. STANLEY, supra note 22, at 117. In the context of the debates, however, Hall's statementwas a response to the opponents' charges that suggested the income tax was a friend of socialism.In the next sentence after the above-quoted passage, Hall said, "We are called demagogues andsocialists, because we advocate this measure." 26 CONG. REc. 1609 (1894). This is not to discountthe conservative tendency of most members of Congress. To suggest, though, that this rhetoricalturn undercuts the honesty of Hall's support for the income tax is to ignore the tricks of debatingand to give short shrift to the genuine pursuit of equality based upon a proportionate system of

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In Congress, opponents of the income tax protested that the tax's exemp-tion of the majority of the population instituted another inequality.35 Under acompensatory theory, however, these apparent inequalities did not disrupt theoverall proportionality. Hall explained, "The rule of proportionality is applica-ble only to the whole tax system and it may be necessary to have severalpartial inequalities in order to establish that final equality."35' Since the poor"contribute more than their share to the maintenance of the state" throughconsumption taxes, an exemption was necessary. 52 In light of the substantialconsumption tax imposed by the tariff, taxing incomes $4,000 or less, there-fore, amounted to a form of "double taxation." '353 One Representative evensuggested that a graduated income tax was necessary because the exemptionalone would not compensate the poor for their burden under the regressivetariff tax.354 Democrats argued that, as long as we assume that "the duties onarticles of common consumption are productive," it is desirable to exemptaltogether smaller incomes from the tax."'

Although some suggested that the exemption was itself a form of gradua-tion,... more explicit graduation was rejected. With prices at their lowest lev-els since before the Civil War,357 it was difficult to argue under the compen-satory theory that the tariff taxes required a graduated tax. As Sherman pre-dicted in 1870, the economic crisis of the 1890s focused people's attention onthe inherent inequality of the regressive consumption tax system. There wasnot the same fervor for a graduated tax, however, as there had been under therampant inflation during the war. The general impression was that an incometax with a healthy exemption was all that was required to counterbalance theregression in the system. This is not to say, though, that a graduated incometax was not advocated at all. For example, Representatives Lafe Pence fromColorado and Joseph C. Sibley from Pennsylvania both introduced amend-

taxation.350. Cockran, in a rhetorical twist bom out of his Tammany leanings, argued, "I oppose this

bill because I will not consent by any act of mine to place the humblest or the poorest of myfellow-citizens on a political plane one shade lower than that occupied by the richest and theproudest." 26 CONG. REC. app. 465 (1894); see also STANLEY, supra note 22, at 118.

351. 26 CONG. REC. 1612 (1894) (citation omitted).352. Id.353. Id. at 1791.354. Representative Lane reached this conclusion through the following logic:

All exemptions of incomes under $4,000 are assumed to be consumable incomes andwill be used in the support of families. This being so, and the Wilson bill providing fora tariff tax of $130,000,000, which is a tax on consumption, the $4,000 exempted willbe liable for its just proportion of the tariff duties under the Wilson bill, which still aver-ages 30 per cent. So even under the income tax, wealth does not yet bear its fair propor-tion of taxation. We should have a graduated income tax that would yield yearly nearly$100,000,000 and not $30,000,000, as is provided in the bill which we are about to pass.

Id. at 1755.355. Id. at 1612 (citation omitted).356. Id. at 1611. Responding to charges that he was not in favor of the principal of a graduat-

ed tax, Hall stated, "I believe that this tax is a graduated income tax. If a man has $5,000 a yearhe pays a tax on $1,000, or $20; if he has an income of $10,000 he pays on $6,000, or $120; andthe gentleman will see that that is a graduated tax." Id.

357. According to the Federal Reserve Bank of New York, the cost-of-living index was at 61in 1860, 103 in 1866, and back down to 73 in 1894. HISTORICAL STATISTICS, supra note 157, at212 (Series E 183-186).

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ments to graduate the income tax. 5 Others also spoke in support of a gradu-ated tax in various forms. Income tax supporters balked, however, when theysaw that the proposals were intended to redistribute rather than compensate.Hall asked of Sibley "whether he believes it is a safe principle of nationallegislation for us to declare that we will use the taxing power not for purposesof revenue, but for the purpose of preventing men from accumulatingwealth?" '359 In the end, all amendments proposing a graduated income taxwere defeated handily and the motion to adopt the income tax as an amend-ment to the tariff bill passed 175 to 56.3"

When the tariff bill itself was put up to a vote, advocates of the incometax based their support on the compensatory theory. Wilson defended theincome tax against charges of class legislation "by declaring that the incometax was simply an honest first effort to balance the weight of taxation so thatit would not be carried exclusively by the poor consumers of the country whohad hitherto borne it all. '36' Thus, support for both the tariff bill, with itsattempt to reduce the burdens on the poor, and for the income tax, with itsattempt to impose some burdens on the rich, was consistent with the desire tonudge the country further towards a proportionate system of taxation. Notsurprisingly, Stanley found in his analysis of the roll call votes that support forthese two measures "went hand in hand. 3 62 The income tax proponents hadsimply switched allies from the pro-tariff forces in the 1870s to the tariffreform forces of the 1890s. Hence, both the consumption tax, and the tariff, orinternal tax, were now susceptible to attack." In both cases, however, theHouse perceived the income tax as a critical part of the overall makeup of thefederal revenue system.

When debate in the Senate commenced in March 1894, opponents of theincome tax quickly sought to rebut the notion that the income tax was neededto counterbalance the effects of the tariff. Nevertheless, the force of the com-pensatory theory's logic prevailed. On April 2, 1894, Senator Daniel Voorhees

358. Pence proposed a tax which went up to 5% on incomes exceeding $100,000. 26 CONG.REC. 1730 (1894). Sibley proposed a substitute for Pence's amendment which raised the exemp-tion to $10,000 and imposed a upper rate of 10% on incomes above $200,000. Id. For expressionsof support, see id. at 1656, 1664, 1731, 1733, 1755; id. app. at 183 (Rep. Andrew J. Hunter) (D-Ill.).

359. Id. at 1730.360. Pence's motion was defeated 112 to 66. Id. at 1739; RATNER, supra note 108, at 179-80.361. RATNER, supra note 108, at 180.362. STANLEY, supra note 22, at 129.363. See Scott A. Taylor, Corporate Integration in the Federal Income Tax: Lessons from the

Past and a Proposal for the Future, 10 VA. TAX REv. 237, 268 (1990). Given the fact that thepro-free-trade Democrats secured simultaneous control of the Presidency and Congress in 1892 forthe first time since the Civil War, it was not surprising that income tax paired with tariff reformthis time around. See V.0. KEY, JR., POLITICS, PARTIES, & PRESSURE GROUPS 170 (5th ed. 1964).Seligman reported that members of Congress initially looked to the prospect of increasing internaltaxes to compensate for the reduction in revenues from tariff reform. SELIGMAN, supra note 30, at505-06. That, however, would have left Democrats without the considerable benefit of an alliancewith income tax supporters. This did not mean, however, that the Democratic supporters of theincome tax did so only for revenue purposes. Quite the contrary, "correcting inequalities in the taxsystem" was their true goal. Id. at 506.

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of Indiana began his introduction of the bill in the Senate in much the samemanner as the bill had left the House. He explained:

On all the wants and necessaries of life the man of wealth, with aheavy income, pays less rates of tariff tax under existing laws thanthe laboring man or laboring woman.... His bonds, his accumulatedriches of all kinds, and all incomes arising from them, are exemptfrom all Government burdens, remaining not only undiminished andunmolested amidst darkened homes and flagrant distress, but growingfatter, stronger, and more defiant as the days and the years go by.3"

Voorhees asked, "What is there in our system of government, or in the demo-cratic principles on which it is founded, that exempts the rich from contribut-ing to its support according to their means?" '365 As in the House, oppo-nents of the income tax argued the inequality of the tax's exemption. NewYork Senator David B. Hill, the governor of New York from 1885 to 1891and the chief power in the New York Democratic machine,3" argued, "If in-comes are properly taxable, then all incomes should be taxed, of whateveramount, taxed proportionally, without favoritism to any individual orclass." '367 Hill argued further that a consumption tax is "the least injuriouspoint of taxation" since consumption taxes are "self-assessed."3" Finally, inan attempt to turn the compensatory theory against the income tax, Hill ap-plied it to reach a different conclusion than that reached by income tax sup-porters. Hill reasoned that at the state and local level it was the poor, not therich, who were escaping their due share of taxation.

[T]he poor man who owns no real estate or personal property paysnothing directly toward State, county, or municipal taxation ... if itwere not for custom-house taxation, [the poor] would pay not a far-thing toward the support of the Government which protects him andunder which he enjoys the blessings and privileges of a free andindependent citizen. It is through this much-abused system of tarifftaxation ... that we are enabled to equalize somewhat the burdens ofgovernment.

369

In a similar fashion, Senator Sherman, still active twenty-five years after hisservice during the Civil War, attempted to justify his rejection of the incometax.370 Sherman focused on the state's ability to levy an income tax, ratherthan its use of a property tax. Thus, he did "not deny that on general princi-ples of equality and justice the incomes of the rich should contribute their full

364. 26 CONG. REC. 3397 (1894).365. Id. at 3398.366. RATNER, supra note 108, at 185.367. 26 CONG. REC. 3559 (1894).368. Id. at 3565.369. Id.370. Many members of Congress in both the House and Senate eagerly quoted Sherman's

famous defenses of the income tax after the Civil War to support their arguments and to take jabsat one of the Senate's fiercest supporters of the tariff. See id. at 1612, 1618, 1791, 5381; id. app.at 183. What likely accounts for Sherman's change of heart is that the tariff fell in disfavor duringthe interim.

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share of taxes." '' Absent a national crisis requiring an increase in revenue,however, Sherman suggested that the states, rather than the federal govern-ment, should institute an income tax to equalize these burdens.372

The fallacy in these arguments was easily exposed. As Seligman laterexplained, "In theory the system of state and local taxation is calculated toreach the respective abilities of the property-owners; but in practice, as hasrepeatedly been pointed out, the general property tax has broken down com-pletely; and, especially so far as personal property is concerned ....Moreover, state income taxes, championed by Sherman as the best solution,were far from realistic. With a few exceptions, most Civil War income taxesin the states were "allowed to lapse after the close of the war," not to berevived until after 1895."' 4 Moreover, "because of the historically poor re-cord of income tax administration by a number of states,'375 few advocatedstate income taxes. Given these realities, and the notion that the real evil wasthe tariff,37 6 the Senate was unwilling to dispense with the compensatorytheory as support for the income tax. Georgia Democrat Patrick Walsh addedto these doubts, noting that the poor already contributed their fair share tostate and local governments through indirect taxes.37 Thus, at the conclusionof the Senate debates, the Senate accepted the income tax provision, althoughthe tariff plan was practically amended to death.3 7

1

Like the House, the Senate refused to adopt the proposals to graduate thetax. Populist Senators William A. Peffer of Kansas and James H. Kyle ofSouth Dakota each proposed a graduated income tax. Peffer suggested anincome tax ranging from 1% on incomes over $2,000 to 5% on incomes over$100,000.1

7 9 Neither Peffer nor Kyle's suggestion received much consider-ation, however. Peffer's motion was tabled by the overwhelming vote of 45 to5, with only Populists opposing the motion to table. s0 Stanley suggests that

371. Id. at 6694.372. Id.373. SELIGMAN, supra note 30, at 640.374. Id. at 414.375. CLARA PENNIMAN, STATE INCOME TAXATION 6 (1980).376. Sherman stated, "The pretext for this measure is that some faults are found in the Mc-

Kinley act." 26 CONG. REC. 6694 (1894).377. Id. at 5382. This was a reference to the common suggestion that all taxes, save the in-

come tax, were easily shifted to someone else, usually the poor, through their eventual inclusionin the price. Thus, a farmer or merchant's prices reflected his property taxes. See EDwIN R.A.SELIGMAN, ON THE SHIFTING AND INCIDENCE OF TAXATION (1899); Herbert Hovenkamp, TheFirst Great Law & Economics Movement, 42 STAN. L. REV. 993, 1006-07 (1990) (collecting cita-tions). In the House, Representative McDannold noted, "This is the lesson that the people havelearned of the incidence of taxation. They want a tax that will stay put. [Laughter.]" 26 CONG.REC. 1616 (1894).

378. Wilson-Gorman Tariff Act, ch. 349, § 32, 28 Stat. 509, 556-57 (1894). In a display ofspecial interest politics which would astonish even modem politicians, the Senate made no lessthan 634 amendments to the tariff portion of the bill, raising rates on many items. To show hisdispleasure, President Cleveland permitted it to become law without signing it. KOENIG, supranote 315, at 132-33; RATNER, supra note 108, at 189. By foregoing the veto, Cleveland preventedthe McKinley Tariff Act from remaining in place. STANLEY, supra note 22, at 136.

379. See 26 CONG. REC. app. 666 (1894) (Rep. William A. Peffer) (Populist-Kan.); id. at6689 (Rep. James H. Kyle) (lndep.-S.D.).

380. STANLEY, supra note 22, at 131.

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the rejection of a graduated tax indicates that Democrats thought the incometax a rhetorical ploy.3" Taking a more neutral tone, Blum and Kalven con-clude that graduation was rejected in 1894 because it had not won "widespreadpublic acceptance" after the Civil War experiment." 2 Neither of these analy-ses, however, is accurate. Instead, the rejection of a graduated income tax isbest understood by considering the economic conditions at the time. Thisperceived change in economic conditions from 1864 to 1894 led most Demo-crats to believe that a flat income tax compensated for the burdens of the tariffduring this sustained period of deflation. Hence, the income tax was principal-ly designed to reach a class of the population which was virtually escapingtaxation altogether. It elevated the overall tax rates of those who, under theconsumption tax system, had paid a much lower percentage of their incomesto the government than the poor. Seligman, in discussing the 1894 Act, re-minded his readers of this fact with regard to the income tax's relatively largeexemption:

It must indeed not be forgotten that we should look at the income taxas a branch of the whole revenue system. Much may accordingly besaid in mitigation of this seeming injustice. As we pointed out above,the burden of taxation-that is, of the tariff and the local propertytax-is borne primarily by the lower middle class, more especially bythe farmers. Even though $4,000 be not a minimum of subsistence, itnevertheless represents in large part the income of a class which is onthe whole unfairly treated at present.38 3

It is revealing that Stanley provides no evidence that income tax supporters,other than the Populists, signalled a commitment to explicit wealth redistribu-tion, as opposed to burden redistribution, in their advocacy of the incometax.

384

381. Id.382. BLUM & KALVEN, supra note 33, at 12.383. SELIGMAN, supra note 30, at 524. While Seligman concluded that the exemption was

indeed too high, he pointed out that the exemption in England was even higher. Id.384. See Joseph Bankman, The Politics of the Income Tax, 92 MICH. L. REV. 1684, 1689

(1994) (reviewing Stanley's Dimensions of Law) ("Stanley presents no evidence, however, tosuggest that the public perceived the income tax to be anything other than it was .... It seemsunlikely that the masses saw redistribution of wealth as an intended purpose or probable effect ofthe tax."). Thus, Stanley's frequent complaint that the 1894 Act, and the acts which preceded andfollowed it, contributed only minimally to revenues, is a bit off the mark. See STANLEY, supranote 22, at 134. The tax was not a revenue measure per se. In fact, coupled with the original re-ductions in the tariff, the measure could not have been expected to increase overall revenues muchat all. However, when viewed as an attempt to require those 85,000 people with incomes over$4,000 to begin paying a more proportionate share of the burden, it elevates in significance. See26 CONG. REc. 3398 (1894) (Sen. Daniel Voorhees) (D-Ind.) (citing an estimate of the Commis-sioner of Internal Revenue on the number of individuals with incomes above $4,000 out of the65,000,000 then in the U.S.). In fact, according to Stanley's estimate, under the 1894 Act, .13% ofthe population was supposed to account for 3.97% of the government's overall revenues. SeeSTANLEY, supra note 22, at 133 (Table 3-7) (Stanley cites an even lower percentage of the popu-lation, only .1%, rather than the .13% one arrives at using Senator Voorhees's numbers). If weassume that everyone contributes an equal amount under a consumption tax (which errs inStanley's favor since many argued that the poor's goods were taxed more heavily and that thepoor had larger families), then those 85,000 had their tax burdens increased substantially. AsBankman notes, "[DJue to high exemption levels, the taxes were quite progressive and were large

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Moreover, it is hard to imagine, especially when given the relative popu-larity of the compensatory theory, that the flat income tax was just a rhetoricalploy. Indeed, employing the income tax as a counterweight for the regressiveeffects of the tariff appeared to coincide with proponents' understanding of theincome tax's role in the federal revenue system. According to Stanley, theAtlanta Constitution, for example, argued in June 1893 that the income tax "isin direct contrast with most of our tariff taxes which fall heavier on the poorthan the rich, the taxes on necessaries being proportionately much heavier thanthose on luxuries;" the paper aptly noted that the income tax "is like a borderto a carpet,... it completes the equipment.""3 5 Similarly, RepresentativeKyle read an article on the floor of Congress from the Chicago Times of April18, 1894, which reported that "[it is characteristic that the attack upon theincome tax was coupled with an attack upon free trade." '386 The New YorkWorld, and a host of other papers, agreed with this analysis. The World arguedthat "the humbler classes have at last discovered the secret of the extortion,and they demand a readjustment of burdens, adapting the share of each morenearly to the benefits received and the ability to pay." '387

After having been prominent during the country's last debates, the com-pensatory theory was also undergoing a revival of sorts in academia.8 Infact, Columbia's Edwin R.A. Seligman, said to be "the most imposing intellec-tual edifice in favor of graduated taxation,""3 9 wrote many of his most prom-inent works during this period.3" In June 1893, as the country edged closerto an income tax, Seligman wrote an article in the Political Science Quarterlyon "The Theory of Progressive Taxation" in which he argued that a graduatedincome tax would "help round out the existing tax system in the direction ofgreater justice."39' As he later said, the progressive income tax acts as "anengine of reparation" in the overall system.392 Seligman was not alone in hisrecognition of the value of this theory. An 1891 essay contest sponsored bythe journal Public Opinion revealed the compensatory theory's currency in the

enough, relative to other taxes, to alter the distribution of the aggregate tax burden." Bankman,supra, at 1689-90.

385. STANLEY, supra note 22, at 120 (citation omitted).386. 26 CONG. REC. 6689 (1894) (Rep. Kyle) (citation omitted). Thus, according to Kyle, the

Times predicted that the income tax in the United States "will be even more popular than in Eng-land, because under our system of raising the bulk of our revenues by tariff duties the inequalitiesof taxation are more glaring." Id.

387. STANLEY, supra note 22, at 120 (citation omitted).388. Id. at 121.389. Id. at 126. Herbert Hovenkamp has called Seligman, "the most prominent public finance

economist of his day," and "[t]he Progressive Era economist with the greatest explicit influence onjudicial policymaking." Hovenkamp, supra note 377, at 1004.

390. Joseph Dorfman, Edwin Robert Anderson Seligman, in DICIONARY OF AMERICAN BIoG-RAPHY 606, 607 (Robert L. Schuyler & Edward T. James eds., 1958).

391. Edwin R.A. Seligman, The Theory of Progressive Taxation, 8 POL. ScI. Q. 220, 222(1893), quoted in STANLEY, supra note 22, at 127. It is often said, quite correctly, that Seligmansubscribed to a justification of progression for its own sake based upon what he called the "facul-ty" theory, a variant of the sacrifice theory, which found that, on balance, people valued luxuriesmore than comforts, and comforts more than necessities. Taxation should thus be graduated totake into account this logic. See SELIGMAN, supra note 30, at 638; Hovenkamp, supra note 377, at1005.

392. SELIGMAN, supra note 64, at 708.

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field. The top two essays each utilized the compensatory theory in fashioninga plan for tax reform. The first prize winner, a 19-year old Wharton student,argued that "the nearest approach to equality will result from a coordination ofthe systems of federal, state, and local taxation, in order by this compensatorymethod to minimize injustice."'3 93 On the question of the progression princi-ple, he noted that "the American people would not easily be reconciled to anyother than a proportional income tax with an exemption of the smaller in-comes." '394 The second prize winner, a 29-year old author and journalist, ar-gued for a graduated income tax "as an offset to the disadvantages of the poorfrom all taxation measured by consumption. ' '

Despite its sound basis in economic theory, the 1894 income tax law wasdefeated by constitutional law principles. Although the tax was scheduled totake effect on January 1, 1895 and continue until January 1, 1900,396 it wasnever implemented. Almost immediately after its scheduled start, two share-holder suits were filed in federal court in New York to prevent their respectivecorporations from paying the tax.397 The case, Pollock v. Farmers' Loan andTrust Co., was argued by some of the most prominent corporate lawyers of theday, including William D. Guthrie, Clarence A. Seward, and Joseph H.Choate.398 Pollack involved a replay of many of the same issues discussedduring the enactment of the income tax in Congress. Guthrie claimed that theAct was unconstitutional in one of two ways: If it was a direct tax, it was notapportioned among the states, and if it was an indirect tax like a duty, impostor excise, it was not uniform because of many discriminations, including theexemption for incomes less than $4,000.'3 Assistant Attorney General Ed-ward B. Whitney grounded his defense of the Act upon the compensatorytheory:

It is impossible to construe this law and discuss its constitutionality orapplication without understanding its underlying principle. This prin-ciple is one of compensation. Certain principles of taxation are wellsettled, and almost universally recognized: first, that taxes on con-sumption bear unduly hard upon the poor and upon what is called bythe economists the lower middle class, financially speaking, becausethe comparatively poor consume all or nearly all of their income; sec-ond, that the fairest method of equalizing taxation is by an incometax with an exemption of all incomes below a certain amount....This exemption approximately represents the incomes which, prior to

393. Walter E. Weyl, in EQUITABLE TAXATION 28 (T.Y. Crowell & Co. 1892).394. Id. at 29.395. Robert Luce, in EQUITABLE TAXATION, supra note 393, at 44.396. RATNER, supra note 108, at 191.397. The cases were consolidated before the Supreme Court under the name Pollock v.

Farmers' Loan & Trust Co., 157 U.S. 429 (1895). As originally filed, the other case was Hyde v.Continental Trust Co. See WITTE, supra note 79, at 73 n.14.

398. BUENKER, supra note 45, at 16. Guthrie, called the "lion of Wall Street," raised the mon-ey for the lawsuit among his clients and found a willing litigant in Charles Pollock. FRIEDMAN,supra note 108, at 566.

399. Pollock, 157 U.S. at 448. In addition to the explicit discrimination between individualsabove and below $4,000, individuals only paid on the excess over $4,000 while corporations paida tax on the whole amount. Id.

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the establishment of the income tax, bore more than their fair share oftaxation.'

Thus, Whitney continued,

[tihe whole attack on the justice of this minimum feature is basedupon a fundamental fallacy; upon the notion that the income taxstands alone instead of forming a part of a general fiscal system, thedifferent parts of which are set to balance each other in approxima-tion to that equality which in its perfection is "a baseless dream."''

Similarly, James C. Carter, attorney for the Continental Trust Company, whichwas the only private party defending the income tax, argued that the Act's"object was to redress in some degree the flagrant inequality by which thegreat mass of the people were made to furnish nearly all the revenue, andleave the very wealthy classes to furnish very little of it in comparison withtheir means."'"42 It was clear that the compensatory theory inundated the legalunderstanding of equality in taxation in these arguments.

Despite the Attorney General's observation that the plaintiffs' "main reli-ance" was upon the Act's lack of uniform application, °3 the Court by a 6-2vote' held the Act unconstitutional on the ground that it was an unappor-tioned direct tax."°5 On rehearing, the Court made clear that the ability of anincome tax to reduce the burden on consumption was not properly the concernof the judiciary.' Thus, despite the vigorous dissent of four justices, ' as

400. Id. at 475-76 (argument of Mr. Whitney).401. Id. at 476 (argument of Mr. Whitney) (quoting Head Money Cases, 112 U.S. 580, 595

(1884)).402. Id. at 517 (argument of Mr. Carter).403. Id. at 504.404. Justice Howell Jackson was absent from this first decision. BUENKER, supra note 45, at

19.405. Pollock, 157 U.S. at 572. Article I of the Constitution provides, "No Capitation, or other

direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directedto be taken." U.S. CONST. art. I, § 9. The rule of apportionment, a compromise borne in part outof the divide between small and large states and in part out of the question of how to countslaves, requires that direct taxes such as poll or property taxes be apportioned between the statesaccording to each state's population. SELIGMAN, supra note 30, at 594. In this manner, large andpowerful states are prevented from imposing all the taxes on the smaller states. Indirect taxes,though, like the carriage tax in Hylton v. United States, 3 U.S. (3 Dal].) 171 (1796), were not sub-ject to the rule of apportionment as part of the state's compromise in ceding the right to tax di-rectly. Today, the concept of apportionment in taxation arises most frequently in the related matterof state taxation of interstate commerce. See, e.g., Oklahoma Tax Comm'n v. Jefferson Lines, Inc.,115 S. Ct. 1331, 1337 (1995).

406. Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601, 634 (1895). Justice Field, in hisconcurrence to the original opinion, had compared the $4,000 exemption to an "arbitrary discrimi-nation" against Catholics and Jews. Pollock, 157 U.S. at 596 (Field, J., concurring). In perhaps afit of self-interest, Field also had taken a shot at the Act's authorization of a tax upon the salariesof federal judges. Id. at 604.

407. The dissenting justices were Harlan, Jackson, Brown, and White. Jackson wrote that thedecision had the effect of "relieving the citizens having the greater ability, while the burdens oftaxation are made to fall most heavily and oppressively upon those having the least ability."Pollock, 158 U.S. at 705 (Jackson, J., dissenting). Harlan, in perhaps the most impassioned of thedissents, wrote:

[U]ndue and disproportioned burdens are placed upon the many, while the few, safelyentrenched behind the rule of apportionment among the states on the basis of numbers,

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well as seemingly controlling authority in five prior cases,"5 the Court struckdown the income tax on May 20, 1895. In a letter to his sons four days later,dissenting Justice John Marshall Harlan wrote that Pollock "will become ashateful with the American people as the Dred Scott case was when it was de-cided .... [It will] make the freeman of America the slaves of accumulatedwealth."'

The enactment and demise of the 1894 Act reveals a solidification of thecompensatory theory. The perceived need to compensate for consumptiontaxes, ever-present since the end of Reconstruction, was magnified when theapparent improprieties of the wealthy combined with the Panic of 1893 tohighlight the lopsided distribution of the tax burden. Unlike the Civil Wartaxes, which were graduated to compensate for the high prices induced by thetariff and other consumption taxes, the 1894 Act was a flat tax designed toensure that the wealthy suffered their proportionate share of the burden. Whilethere is much discussion about the causes for the income tax's repeal inPollock,4 what is clear is that, despite the invitation of the plaintiffs' attor-neys, the case did not question Congress's authority to balance the burdens oftaxation through a progressive income tax.

III. THE SIXTEENTH AMENDMENT AND THE ACT OF 1913

A combination of factors led to the re-emergence of the income tax as adesirable method of taxation in the decade-and-a-half after Pollock. Startingaround 1897, there was a gradual but significant increase in the cost-of-livingto the highest levels since the Civil War, an increase for which the tariff re-ceived the primary blame. A second factor was the Panic of 1907, after whichthe tariff-reform Democrats, pro-income tax Progressives, and Insurgent Re-publicans ascended to positions of control and influence. The result was theenactment of the Sixteenth Amendment and the graduated income tax in theUnderwood/Simmons Tariff Act of 1913. Much like the Civil War incometaxes, the progressive rates were a response to the perception that the tariffwas burdening the poor, in the form of higher prices, with more than their fairshare of taxes. Thus, consistent with the country's tradition, the income tax inthe Act of 1913 was used to achieve the goal of a flat or proportionate rate taxsystem.

are permitted to evade their share of responsibility for the support of the governmentordained for the protection of the rights of all.

Id. at 685 (Harlan, J., dissenting).408. Justice White cited five cases for the proposition that the phrase "direct taxes" in the

Constitution was intended to refer only to land: Hylton v. United States, 3 U.S. (3 DalI.) 171(1796) (carriage tax); Pacific Insurance Co. v. Soule, 74 U.S. (7 Wall.) 433 (1868) (insurancecompany receipts tax); Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869) (bank notes tax);Scholey v. Rew, 90 U.S. (23 Wall.) 331 (1874) (inheritance tax); and Springer v. United States,102 U.S. 586 (1880), which held that a Civil War income tax was not a direct tax and thereforedid not need to be apportioned. See Pollock, 158 U.S. at 711.

409. Komhauser, supra note 297, at 141 (citing David G. Farrelly, Justice Harlan's Dissent inthe Pollock Case, 24 S. CAL. L. REV. 175, 180 (1950)).

410. See, e.g., BUENKER, supra note 45, at 18-22; FRIEDMAN, supra note 108, at 566-67;RATNER, supra note 108, at 193; STANLEY, supra note 22, at 138.

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Although deflation characterized the period before the 1894 Act, the na-tion saw the beginning of sharp price increases at the end of the century. It isestimated that prices increased nearly 33% between 1897 and 1913, an averageof 2.3% annually.4 ' The rise was more dramatic for necessities. Staples suchas lard, linseed oil, flour, and butter increased in price from 45% to 184%.4I2

As a result, the cost-of-living index rose from 73 in 1894 to 102 in 1912, itshighest level since the Civil War.4 3 More important than any actual rise inthe cost-of-living, though, was the fact that Congress saw the need to respond.The Senate Select Committee on Wages and Prices of Commodities, chairedby staunch Republican Standpatter Henry Cabot Lodge of Massachusetts,wrote that "retail prices in the United States in the spring of 1910 were formany articles at the highest point recorded for many years."'4

14 The House

Ways and Means Committee acknowledged even more dramatic concern in1913, stating that "probably the most striking economic change since 1897 hasbeen the tremendous increase in the cost of living-a situation which has at-tracted the anxious attention of economists the world over."4 5

Compounding this problem was the failure of wages to keep pace with therise in the cost-of-living. Union wages, for example, increased by 14% from1898 to 1907, while the cost of living rose by between 20% and 25% in thesame period. One study concluded that "the purchasing power of wages in-creased only about sixteen percent while prices rose 36.8 percent. '416 TheSenate Select Committee found that "wages have not advanced as rapidly ashave prices and practically all labor difficulties which have been the subject ofmediation in the United States during the past few years have had as theirbasis the advanced cost of living."4 7

Many blamed this inflation on the reinstitution of highly protective tariffsafter the 1896 elections. Although tariff reform could not have been responsi-ble for the Panic of 1893, Republicans seized on the Panic's lingering effectsas a consequence of the declared retreat from protectionism." 8 In this man-

411. BUENKER, supra note 45, at 33.412. Id. at 33-34.413. HISTORICAL STATISTICS, supra note 157, at 212. Other indexes showed a similar rise.

According to Burgess's index, the cost-of-living rose from 63.9 in 1897 to 100 in 1913; accordingto Douglas's index, it rose from 97 in 1894 to 137 in 1913; and according to Rees's index, it rosefrom 83 in 1897 to 99 in 1913. Id.

414. BUENKER, supra note 45, at 34 (quoting the Senate Select Committee on Wages andPrices, chaired by Standpat Republican Henry Cabot Lodge of Massachusetts) (citation omitted).

415. Id. With the House Ways and Means Committee under Democratic control by 1913, it islikely that the more dramatic rhetoric was motivated by partisan interests. See George E. Mowry,Election of 1912, in THE COMING TO POWER 264, 292 (Arthur M. Schlesinger, Jr. et al. eds.,1971).

416. BUENKER, supra note 45, at 34; HISTORICAL STATISTICS, supra note 157, at 212 (SeriesE 183-186). Although Albert Rees disproved the commonly held belief that wages remained stag-nant between 1890 and 1914, it is clear that the rise in wages which did occur failed to increaseworkers' purchasing power appreciably. See RATNER ET AL., supra note 70, at 309 (citing ALBERTREES, REAL WAGES IN MANUFACTURING, 1890-1914 (Princeton 1961)).

417. S. REP. No. 912, 61st Cong., 2d Sess., pt. 2, at 28 (1910), The number of strikes hadindeed increased during the period, although the success rate had dropped from 50% to 36%.There were 3,100 strikes between 1911 and 1915, while there were only 530 strikes during themuch longer period between 1881 and 1895. RATNER ET AL., supra note 70, at 317.

418. ASHLEY, supra note 85, at 219; KEY, supra note 363, at 170-71.

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ner, the Republicans regained control of both houses of Congress during themidterm elections of 1894, and, with the election of William McKinley, tookback the Presidency in 1896. 4

19 The Republicans viewed their victory as a

"mandate for a high protective tariff."42 As such, McKinley made good onhis promise to erect a protective tariff in 1897 with the passage of the "strong-ly restrictive" Dingley Tariff Act.42 ' The resulting high tariff rates came backto haunt Republicans, however, when prices began their ascent. Democrats,who capitalized on the perception that the protective tariff was to blame forhigh prices, called for, in their 1912 platform, "downward revision of tariffduties on grounds that existing rates made 'the rich richer and the poor poor-er,' and accounted for 'the high cost of living' that plagued American fami-lies." '422 Although protectionists attempted to turn the blame against the poorand dismiss their woes as "the cost of high living," '423 the weight of theblame fell on the tariff.4 24 Moreover, despite Republican denials, leaders inboth parties "agreed that the electorate's association of the rising cost of livingwith Republican insistence upon a high protective tariff was the single mostimportant political issue of the day. 425

This long-term discontent leaped to the forefront of the public's mindafter the Panic of 1907.426 This panic, which was triggered initially by the

419. Fite, supra note 310, at 225, 256.420. RATNER ET AL., supra note 70, at 390.421. BENDER'S FEDERAL REVENUE LAW, supra note 85, at 357; KEY, supra note 363, at 174.

The Act instituted an average rate on dutiable goods, 52%, which was the second-highest inAmerican history. RATNER ET AL., supra note 70, at 390.

422. LEROY ASHBY, WILLIAM JENNINGS BRYAN: CHAMPION OF DEMOCRACY 138 (1987);BUENKER, supra note 45, at 35.

423. John Buenker attributes this phrase to James J. Hill. BUENKER, supra note 45, at 35.Lodge's Committee similarly attempted to evade this link, contending "that 'the tariff seems tohave been no national factor in causing the advance in prices during the past decade,' blaming iton the desire to 'keep up with the changing styles in clothing and shoes."' Id. (quoting the LodgeCommittee) (citation omitted). Obviously, it is difficult to win over allies to protectionism by in-sulting their spending habits.

424. Economic historians Paul Studenski and Herman Krooss note, "Rightly or wrongly, theurban population blamed the tariff for the current rise in prices." See BUENKER, supra note 45, at37-38 (citing PAUL STUDENSKI & HERMAN E. KROOSS, FINANCIAL HISTORY OF THE UNITEDSTATES 270-71 (1963)).

425. Id. at 37.426. Stanley dismissed the long-term discontent and focused exclusively on the action taken

after the Panic of 1907. Noting the cyclical nature of the bills introduced and articles written onthe income tax, he argued that the primary impetus behind the Sixteenth Amendment and theRevenue Act of 1913 was the desire to quell the depression's ensuing social instability. STANLEY,supra note 22, at 183. While I agree with Stanley that this refutes the traditional understandingthat the Amendment was exclusively the result of a Progressive movement after Pollock, I think itascribes too much force to the Panic itself. Stanley himself admits that President Theodore Roo-sevelt expressed his support for an income and inheritance tax in 1906, well before any sign ofinstability. Id. at 186. The American Federation of Labor Convention in 1906 also called for anincome tax as a way to more equitably share the burdens of taxation, and the Democrats hadcalled for an income tax in their party platform in every year but 1904, when they insteadstrengthened their antitrust provisions. BUENKER, supra note 45, at 42, 45. Furthermore, while thecontinuing high cost of living was still a source of tension in 1913, the nation's overall return toprosperity and drop in unemployment hardly resembles the conditions of the violent Pullmanstrikes in 1894. See Mowry, supra note 415, at 264. The Panic was important for its effect ofsharply focusing attention on the inequality of the tax system which had been a nagging undercur-rent since the 1890s.

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failure of the Knickerbocker Trust Company and the Trust Company of Amer-ica, extended through 1909.427 During this period, relief applications in-creased five-fold in some cities and the manufacturing and construction indus-tries severely cut back their labor forces.428 Perhaps the greatest impact ofthe Panic, though, was its function as a vehicle for reform. The Aldrich-Vreeland Act of 1908 and the Federal Reserve Act of 1913 were proposedbecause of concern for the system's inability to provide adequate capital mar-kets due to monetary inelasticity-a principal worry of the Populists duringthe 1890s. 429 The tariff reform area underwent similar changes, as both par-ties pledged support for tariff reform in the 1908 elections, and the Republi-cans promised to hold a special session of Congress on the subject during thenext term.430 Moreover, presidential candidates William Jennings Bryan andWilliam Howard Taft expressed their support for an income tax, with theeventual victor, Taft, declaring in his acceptance speech that it was both con-stitutionally permissible and potentially desirable to have an income tax inconditions of urgent need.43' The issues of tariff reform and the income taxwere once again inextricably linked.

On March 4, 1909, Taft formally called a special session of Congressdedicated to the issue of tariff reform.4 32 Later termed "one of the most con-tentious and significant special sessions in the history of the national Legisla-ture," it illustrated the political breakdown which had arisen from the incometax's seeming unavailability as a method of compensation for the tariff.433

Republicans ostensibly dominated both houses of Congress,434 but a rift wasgrowing in their ranks. Regular Republicans, or "Standpatters," followed thetraditional party line of high protectionism. A small group of Republicans inCongress, however, were straying from this stance. Known as "Insurgent"Republicans, these primarily Western Representatives and Senators believed in

427. STANLEY, supra note 22, at 184.428. Id. at 185.429. GOODWYN, supra note 297, at 518-19. The Aldrich-Vreeland Act authorized groups of

banks threatened by depositor panic to issue a form of emergency currency backed by certaintypes of their loan and investment assets. It also provided for the establishment of a NationalMonetary Commission to study and recommend more permanent changes, which eventually in-cluded the Federal Reserve Act. See RATNER ET AL., supra note 70, at 366.

430. Republicans offered tariff "revision" without promising reductions, while the Democratsexplicitly promised tariff reductions. STANLEY, supra note 22, at 185-86. See BLAKEY & BLAKEY,

supra note 337, at 23-24. Representative James, a Kentucky Democrat, later offered his explana-tion for the Republicans' promise of a special session rather than immediate action:

The reason the Republican party would not reform the tariff before the election was theyknew if they did reform it in the interests of the people, the corruption fund, which theywere so used to receiving, would be denied them by the favored few with whom theywere in partnership. They knew if the legislation was in the interests of monopolies, as itnow is, the people would rebuke them, so they put it off until after the election.

44 CONG. REC. 4399 (1909).431. BUENKER, supra note 45, at 54; STANLEY, supra note 22, at 186-87. For Taft, even this

minimal concession was a break from most Republicans and had not been a part of the partyplatform. See Hobbs, supra note 179, at 453.

432. STANLEY, supra note 22, at 190.433. BUENKER, supra note 45, at 57.434. In the 61st Congress, Republicans held a 214-175 majority in the House and 60-32 ma-

jority in the Senate. Id. at 58.

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a more popularly-centered focus of government, free of special perks andfavors for big business. On the tariff, Insurgents sought a more "scientifically"drawn tariff policy which pinpointed protection for "legitimate" industries."',Although the Insurgents did not endorse a tariff for revenue only, they wereallied with the Democrats in their support of an income tax on grounds of "tax

,,436equity.Given this changing political landscape, Republicans could not avoid the

income tax issue when House Ways and Means Chair Sereno Payne of NewYork introduced a tariff bill coupled with an inheritance tax.41' DemocraticSenator Joseph W. Bailey of Texas, who was faced with tariff bills whichfailed to meaningfully address the cost of living issue and an inheritance taxwhich duplicated state programs but satisfied no one, introduced an amend-ment to the tariff bill proposing a flat income tax of 3% on incomes above$5,000."38 It was, "in the main, the same as the law of 1894." 4" Bailey im-plied that nothing short of an income tax could serve to compensate for thetariff, and openly contested the judiciary's power to strike down the tax. Inthis regard, Bailey admitted that he was not attempting to conform the amend-ment to the Court's Pollack's decision, but instead was offering an amendmentthat distinctly, and directly, challenged that decision."' Two days later theDemocratic caucus adopted Bailey's proposal as a party measure."' In re-sponse, the Insurgents proffered an income tax bill introduced by AlbertCummins of Iowa. Cummins proposed a graduated tax ranging from 2% onincomes not exceeding $10,000 to 6% on those exceeding $100,000."2 Whentwenty-one Republicans announced their support for the Cummins bill, a ma-jority of the Senate had now registered its support for some form of an incometax." 3 Forced to confront the issue, Republican Norris Brown submitted aproposal for a Constitutional amendment granting Congress the power to col-lect taxes on incomes and inheritances. Brown declared he was "in full accordwith the proposition of laying some of the burdens of taxation upon the in-comes of the country," but was against flouting the Supreme Court's authoritywith the futile gesture of submitting a virtual reproduction of the 1894

435. See id. at 67. The call for a scientific tariff was a typical reform measure designed toremove some of the lobbyist's influence from the revenue arena. Instead of determining ratesbased on conjecture or political pressure, the rates would be objectively based upon data con-cerning the relative costs of production. Thus, cheap labor abroad would be compensated for by atariff equal to the difference between foreign and domestic labor costs in a particular industry. Seeid. at 359; Komhauser, supra note 297, at 75 n.82; Tarullo, supra note 73, at 292-93. One sus-pects that a politician's notion of a "scientifically targeted" tariff often translated into one which"protects my industries rather than yours."

436. BUENKER, supra note 45, at 90.437. STANLEY, supra note 22, at 191-92.438. See SELIGMAN, supra note 30, at 592 (citing 44 CONG. REC. 1351 (1909)).439. 44 CONG. REC. 1351 (1909); see STANLEY, supra note 22, at 192-93. The inheritance tax

had not even satisfied Regular Republicans, since Senate Finance Committee Chair Nelson Aldrich(R-R.I.) eliminated the tax from his version of the tariff bill submitted by the House. BUENKER,supra note 45, at 100.

440. 44CONG. REC. 1351 (1909).441. BUENKER, supra note 45, at 100.442. 44 CONG. REC. 1420 (1909).443. BUENKER, supra note 45, at 101.

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Act.' Even if the Court were to reverse itself on this occasion, Brownasked, "how long will that decision stand?"" 5

The ensuing debate over these measures illustrate Congress's acceptanceof the compensatory theory. On May 4, Insurgent William Borah of Idahostood to defend Cummins' proposal. Arguing that the issue could safely beresubmitted to the Court, Borah declared that the Framers did not intend "thatall taxes of this Government should be placed upon the backs of those whotoil, upon consumption, while the accumulated wealth of the Nation shouldstand exempt."' Regular Republican Elihu Root, corporate counsel to suchfinancial giants as Jay Gould, Thomas Fortune Ryan, and E.H. Harriman, tookgreat pains to explain that the states had already adequately compensated forthe tariff's regressive effects:" 7

It is not a fact that in this Republic property does not now bear avery great proportion of the burden of taxation.... [Tihe property inthe United States upon which the ad valorem taxes for the support ofthe Government, county, municipal, and other local governments,were levied amounted at a true value to $97,810,000,000; that advalorem taxes were levied upon that property at the rate of seventy-four one-hundredths of 1 per cent; that is, in round numbers, three-fourths of I per cent; and that would amount in round numbers to theequivalent of an income tax of 15 per cent upon all property in theUnited States.4a

Of course, much like Bourne Cockran's attempt in 1894, Root's argument wasopen to attack. Borah asked him, "[W]ho at last pays the large portion of thereal estate tax in this country, the real-estate owner or the renter?"' 9 Moreimportantly, however, income tax opponents were once again accepting mostsupporters' understanding of a just and equitable tax system based on flat orproportional rate taxation.

Sensing the strength of the pro-income tax position, the Democrats andInsurgents aligned to create the Bailey-Cummins bill, a compromise whichproposed to ignore Pollock and enact a flat 2% tax on individual and corporateincomes exceeding $5,000.50 Nelson Aldrich, the GOP's powerful leader in

444. 44 CONG. REC. 1568 (1909). Brown is called a "halfway Insurgent" by Sidney Ratner,although he does not define the term. He is probably "halfway" there because of his underlyingsupport for an income tax as a supplement to the tariff, since most Regular Republicans, especial-ly Nelson Aldrich, believed the tariff alone could provide sufficient revenue. RATNER, supra note108, at 298; see BUENKER, supra note 45, at 83, 100.

445. 44 CONG. REC. 1568 (1909).446. Id. at 1701.447. BUENKER, supra note 45, at 60.448. 44 CONG. REc. 1701 (1909).449. Id. Borah is referencing the shifting incidence of taxation to which the income tax was

allegedly not subject. See supra note 22. Another weakness in Root's conclusion is that he doesnot compare his figures with those for consumption taxes. Even if the wealthy were already sub-ject to a 23% effective tax on their incomes, the consumption tax was historically thought bysome to take 70 to 90% of the poor's income while extracting only 3 to 10% of the wealthy'sincome. See KOENIG, supra note 315, at 130. Thus, the property tax could not have served as acomplete compensation.

450. BUENKER, supra note 45, at 101; STANLEY, supra note 22, at 195.

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the Senate, succeeded in delaying the bill's introduction until the tariff issueshad been resolved.4 ' In the meantime, Regular Republicans, in search of asolution, approached President Taft. As Standpatter Henry Cabot Lodge ex-plained, "they had the votes" to pass the Bailey-Cummins bill and directlychallenge the Court's interpretation in Pollock."2 Thus, Republican leadersadopted a compromise: a proposed amendment to the Constitution, much likeNorris Brown's, but one which replaced the inheritance tax with a corporationexcise tax. The compromise allowed Regular Republicans to forestall theincome tax, permanently they hoped, while providing a source of revenue toreplace income lost through the tariff revisions.4" After succeeding in delay-ing a vote on the Bailey-Cummins bill, Aldrich managed to overcome theDemocrat-Insurgent alliance's resistance and force consideration of both theamendment and corporation tax. 54

Some suggest that the success of the compromise indicates that the in-come tax alliance was never on firm grounds.455 Rather than illustrating alack of "true" support for the income tax, though, the compromise demonstrat-ed that the income tax's support was a function of the makeup of the entirerevenue system. The tariff issue had dominated the 1908 election and Con-gress could not return from the special session without resolving it. SinceAldrich still had the votes and influence to control the tariff schedules, manyincome tax supporters acceded to the proposed solution. '56 Thus, the successof the compromise reflected the reality that this special session was focused onthe burdens placed on the poor due to the tariff, rather than the lack of contri-bution from the rich due to the absence of the income tax. Furthermore, sup-porters of the compromise did not perceive that the corporation tax abandonedthe goal of proportionate taxation under the compensatory theory.457 AsBorah pointed out:

[It] has been somewhat extensively assumed, that this is anothermeans of placing a tax upon the wealth of the country; that by thisprocess of singling out corporations we will reach the wealth of theland rather than to place a tax upon consumers, or that great body ofAmerican citizenship which now bears its undue proportion of thetaxes of the country.4"'

451. BUENKER, supra note 45, at 102; STANLEY, supra note 22, at 195.452. STANLEY, supra note 22, at 194-95.453. See id. at 199-200 (arguing that the possibility that the compromise served any other

purpose than to delay the income tax, such as to raise revenues, was small given the total reve-nues raised from the measure).

454. BUENKER, supra note 45, at 105; RATNER, supra note 108, at 300; STANLEY, supra note22, at 195.

455. See STANLEY, supra note 22, at 196. Stanley argues that if the Democrat-Insurgent alli-ance had enough votes to pass the income tax measure and to force the Regular Republicans tomeet with Taft, it should have had enough votes to avoid the compromise altogether. Id. Thisassumes that support for the income tax was independent of the goal of tariff reform.

456. Id. at 195.457. Sidney Ratner suggests that Taft's selection of a corporation excise tax after previously

espousing an inheritance tax demonstrates that his support of an income tax amendment was asham designed to hinder the Democrat-Insurgent alliance. RATNER, supra note 108, at 288, 291.But see Komhauser, supra note 297, at 54 (arguing that Taft genuinely supported the corporationexcise tax as a method of corporate regulation).

458. 44 CONG. REC. 3985 (1909). Borah went on to note that "the interested American people

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Even if, as Borah contended, this position was a "thin guise" for truly shiftingthe burden back on consumers,459 it illustrates the resonance of the compen-satory theory.' Aldrich had always maintained that no additional revenueswere needed besides the tariff, but had his view prevailed, Republicans wouldhave had little need to justify the corporation tax as a method of equalizingthe burdens of taxation.' As Marjorie Kornhauser has stated, rhetoric "mustreflect deeply and widely held views or else it will lack the power it needs topersuade." 2 Supporters' reliance on the compensatory theory to justify thecompromise demonstrates acceptance of flat or proportional rate taxation asthe most just distribution of the burdens of taxation. During the debate in theHouse, one Republican admitted that for the wealthy, "an income tax mustbear a proportionately great share of the government taxes." 3 Finally, sup-port of a constitutional amendment was consistent with the goal of securing anincome tax. In this respect, the Democratic platform in 1908 had called for thesubmission of a constitutional amendment to ensure the presence of "an in-come tax as part of our revenue system."'' Even William Jennings Bryanhad conceded in a speech in 1908 that the President should push for an in-come tax amendment "since it seemed improbable that Congress could designa tax which would be acceptable to the Court." 5 To a supporter of the in-come tax, a defeat at the hands of the Court was no better than a defeat at thehands of the state legislatures.

Debate over the wording of the amendment, although minimal, demon-strated that graduated rates were not seen as essential to achieve the goals ofan income tax. On July 5, Bailey proposed that the amendment allow forratification by popular convention and explicitly permit Congress to "grade"any income tax. ' This latter consideration was prompted by JusticeBrewer's dissent in Knowlton v. Moore,' in which the Court approved agraduated inheritance tax emerging from the Spanish-American War's revenueacts.' Bailey noted that if Brewer's view prevailed, and Congress was with-

are looking on, thinking that we are trying to get a tax upon wealth" with the corporation tax mea-sure. Id. at 3986.

459. Id. at 3985.460. Income tax supporters charged that the corporation tax was a "subterfuge" to defeat the

income tax. Id. at 3929.461. Aldrich essentially admitted that his support for the corporation tax was contrary to his

views, declaring, "I shall vote for a corporation tax as a means to defeat the income tax." Id. Heargued that it would be better to reduce expenses if the tariff did not meet needed revenues. Thisview, however, was not in the majority as indicated by the support for the income tax measures.

462. Kornhauser, supra note 297, at 138.463. 44 CONG. REC. 4399-40 (1909) (Rep. Keifer) (R-Ohio).464. SELIGMAN, supra note 30, at 591.465. BUENKER, supra note 45, at 55.466. 44 CONG. REC. 4108 (1909). The proposal for submission to popular conventions, as

opposed to the state legislatures, was an attempt to assure passage was not affected by "localissues" or "change" in the representatives' opinions since the last election. Id. This proposal wasdefeated 46-30 in a vote which mirrored the vote on the substitution of the corporation tax for theincome tax. BUENKER, supra note 45, at 131.

467. 178 U.S. 41, 110 (1900) (Brewer, J., dissenting in part and concurring in part).468. 44 CONG. REc. 4108 (1909). The Court held that concerns about the progressive feature

of the tax was a legislative rather than judicial question. Knowlton, 178 U.S. at 109. Brewer's

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out power to grade an inheritance tax, it would also be without power, evenunder the amendment, to grade an income tax.' Senator Anselm J.McLaurin, a Democrat from Mississippi, proposed instead to remove the directtax clauses from the Constitution altogether. He noted that this would "elimi-nate from the Constitution every cause of contention over the question of theauthority of Congress to levy an income tax, except as to the power of Con-gress to grade an income tax."47 It was clear that Bailey did not have thesupport in Congress to explicitly authorize a graduation of the income tax, andhe withdrew the proposal, stating, "I am satisfied that this amendment will bevoted down; and voting it down would warrant the Supreme Court in hereaftersaying that a proposition to authorize Congress to levy a graduated income taxwas rejected."47' At a minimum, the resistance to Bailey's proposal suggeststhat Congress believed an income tax could exist in a meaningful sense with-out graduated rates. If redistribution of wealth had been the goal, there shouldhave been at least some defense of graduation by income tax supporters. Thus,it is difficult to support the notion that the states thought they were ratifying"a predictably progressive-that is, a redistributive-income tax" when pre-sented with the Sixteenth Amendment. 2

dissent in Knowlton followed from his dissent in Magoun v. Illinois Trust & Say. Bank, 170 U.S.283, 300-01 (1898), in which the Court held that Illinois' graduated inheritance tax was constitu-tional. Brewer dissented on the ground that the Constitution would not permit such arbitrary dis-crimination. Id. at 303 (Brewer, J., dissenting).

An inheritance tax was often viewed differently than a tax on property or income since theformer was a tax on the right of succession, a right of legislative creation, while the latter was atax on property rights more akin to "natural" rights. Id. at 288. Thus, a graduated tax was notsusceptible to attack under the Due Process Clause. Recognizing this, the petitioner in Magounattempted to argue the case under the Equal Protection Clause. But, as one commentator noted:

The phrase "equal protection of the laws" is so evidently intended to be indefinite thatthe court has never attempted to fix its meaning. They have often declared, however,that almost no classification of persons for purposes of taxation can be held to interferewith this provision of the Constitution, so long as all within a class are treated alike.Only a discrimination obviously based on grounds wholly foreign to the proper ends ofgovernment could be held unconstitutional.

Case Comment, Illinois Inheritance Tax, 12 HARV. L. REv. 127, 128 (1898).In Wisconsin, for example, an inheritance tax was supported on explicitly redistributive

grounds while an income tax was justified as distributing the burdens of taxation more equally.See Joseph A. Ranney, Law and the Progressive Era, Part 2: The Transformation of Wisconsin'sTax System, 1897-1925, WIS. LAW., Aug. 1994, at 22, 23 & n.16. Despite this difference in rheto-ric, inheritance taxes were often flat, and were generally not steeply progressive. FRIEDMAN, supranote 108, at 570. Where a progressive inheritance tax was invalidated by a state supreme court, itwas usually on the basis that a classification, while permissible, was arbitrary and unreasonablewhen made purely on a quantitative basis. See In re Cope's Estate, 43 A. 79, 81 (Pa. 1899);Judson A. Crane, Progressive Income Taxes and Constitutional Uniformity of Taxation, 2 U. Prrr.L. REv. 44, 47 (1935).

An inheritance tax is also viewed differently on the moral ground that earned income maybe kept while unearned income is available for redistribution. See Kornhauser, supra note 297, at142; see also James K. Glassman, The Rich Already Pay Plenty, WASH. POST, July II, 1995, atA17 (arguing that a flat tax is fair to the rich, but conceding that he would "be in favor of hikingestate taxes to minimize the luck of birth" in creating wealth).

469. 44 CONG. REC. 4108 (1909).470. Id. at 4109.471. Id. at 4120.472. Amar, supra note 23, at 291. The Senate truly "agreed" on the wording of the proposed

amendment, approving it 77-0 with fifteen abstentions. Certainly the goals differed, with Demo-crats and Insurgents voting for it "because they believed in it as the fairest form of taxation, the

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From the history of ratification, it appears that the Sixteenth Amendmentwas more a response to the tariff than a call to redistribute wealth.47 On Au-gust 5, 1909, Congress passed the Payne-Aldrich Tariff Act. Although it wasintended to be a concession to the demand for tariff reduction, the Act main-tained the high rate structure of 1897."' It "brought no essential change inour tariff system," with "no downward revision of any serious conse-quence."475 This failure to respond to the public outcry over the tariff wasfatal to the Republican Party. As Representative Adam M. Byrd, a MississippiDemocrat, warned during the debate over the compromise proposal in theHouse, consumers could not possibly be helped by either the Amendment orthe corporation tax "unless the tax burden imposed by the tariff is decreased inproportion to the amount of revenue derived by the income and corporationtaxes." 76 Thus, the tariff again assumed heightened significance during theelections of 1910 and the ensuing ratification process.47 7 Consider that two-thirds of the states had not even considered the proposed amendment before1910 and its elections.47 These elections not only ushered in significant vic-tories for Democrats and Insurgents, based primarily on the issue of the tariff,but also succeeded in further dividing the Republican party.47 9 Democratsgained control of the governorship and both houses of Congress in New York,Ohio, Indiana, and Maine. Democrats also captured one house of the legisla-ture and the governor's seat in both Connecticut and New Jersey, the latterelecting Woodrow Wilson. Moreover, for the first time since 1890, Democratsgained control of the U.S. House of Representatives. The New York Times'post-election headline read, "the Democratic Party carried the Union yester-day."' 0 Then, in the election of 1912, not only did Woodrow Wilson beat

Standpatters because it was part of the 'deal' Aldrich had agreed to and because they hoped to de-feat ratification in the future." BUENKER, supra note 45, at 131, (quoting THOMAS R. Ross, JONA-THAN PRENTISS DOLLIVER 259-60 (1958)). The House was similarly in favor, voting 318 to 14 toapprove the resolution. RATNER, supra note 108, at 302. Many income tax supporters no doubtfelt as Representative Ollie M. James (D-Ky.) felt when he declared, "I shall vote, Mr. Speaker, tosubmit this constitutional amendment to the States; but when I do so, I do not concede, nor doesthe Democratic Party concede, that Congress has not now the power to impose such a tax." 44CONG. REC. 4398 (1909). Representative Charles L. Bartlett (D-Ga.) expressed similar feelings,declaring his intent to vote for the resolution "because in no other way am I permitted to show myapproval of this method of taxation." Id. at 4410.

473. For a state-by-state discussion of the ratification of the amendment, see BUENKER, supranote 45, at 143-58. Of course, discerning intent from the ratification of an amendment is nearlyimpossible in light of the many political entities involved. See Marjorie E. Kornhauser, Constitu-tional Meaning of Income and the Income Taxation of Gifts, 25 CONN. L. REv. 1, 11 (1992).However, the rhetoric during the process is especially revealing of the key issues.

474. BENDER'S FEDERAL REVENUE LAW, supra note 85, at 358; RATNER, supra note 70, at390; STANLEY, supra note 22, at 199. Although it did little to mitigate the hostile attitude towardthe tariff, the average ad valorem duty on dutiable goods went down to 42% from a high of 52%under the Dingley Tariff Act of 1897. Id.

475. STANLEY, supra note 22, at 199 (citation omitted).476. 44 CONG. REC. 4417 (1909).477. ASHLEY, supra note 85, at 252-53.478. BUENKER, supra note 45, at 147.479. Id. at 148-49; Mowry, supra note 415, at 269. In an effort to purge the party of Insur-

gents and Progressives, Taft had campaigned against the more radical members of his party up forre-election. Failing miserably, Taft assured himself of a sizeable group of enemies in the future.See KEY, supra note 363, at 178; Mowry, supra note 415, at 267.

480. BUENKER, supra note 45, at 148-49; Mowry, supra note 415, at 271.

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out Taft and Roosevelt for the Presidency, but the Democrats also secured aseventy-three seat edge in the House and a six seat margin in the Senate. '

"[M]ost analysts found the major cause of this political upheaval to be thewidespread desire of voters to 'punish the Republican Party' for its belief,rational or irrational, that the high protective tariff was responsible for theescalating cost of living and for the construction of trusts." 2 Perhaps inlight of this fact, almost one-half of Wilson's acceptance speech at the nomi-nating convention "was devoted to an analysis of the protective tariff as abreeder of special privileges and special favors." 3 Similarly, in one ofTaft's last messages to Congress after his defeat, he admitted that "a newCongress has been elected on a platform of a tariff for revenue only ratherthan a protective tariff." 4 Thus, as a reaction to the tariff, the election re-turned to power individuals, whether Democrat, Republican, Insurgent, orProgressive, who were willing to work toward removing some of the burdenon the poor and distributing it to the wealthy. John Buenker observed that"[t]he nation's voters had rendered as clear a judgment as the vagaries of theAmerican political process permit against the party that they associated withthe high cost of living and with favoritism toward the organized and the afflu-ent, conditions that a federal income tax was purportedly designed to counter-act."" 5 Ratification, achieved when Delaware voted to accept the amend-ment on February 3, 1913, signalled a commitment to change the Nation'soverall revenue policy, not just its use of the income tax. 6 Supporters

481. BUENKER, supra note 45, at 152; Mowry, supra note 415, at 292. Progressives and someInsurgents, flush with their recent victories in state and federal elections, had attempted to win theRepublican nomination away from Taft with Wisconsin Senator Robert La Follette as their choicefor nominee. Unsuccessful, they drafted Theodore Roosevelt as their candidate and formed theBull Moose Party. JOHN A. GABLE, THE BULL MOOSE YEARS: THEODORE ROOSEVELT AND THEPROGRESSIVE PARTY 12 (1978); WITE, supra note 79, at 76. After 1912, Progressives in majoroffices included one governor, two senators, and 16 representatives. Mowry, supra note 415, at293. Most significantly, however, was that Roosevelt outdistanced Taft for second, pulling in 88electoral college votes to Taft's 11. GABLE, supra, at 131. Such impressive first-time performancesled the chair of the Progressive Party, Senator Joseph Dixon of Montana, to predict that the Re-publicans had become a third party. BUENKER, supra note 45, at 153.

482. BUENKER, supra note 45, at 149; STANLEY, supra note 22, at 219. The Nation reportedthat Maine's Republican congressmen who had voted for Payne-Aldrich were "savagely heckledby the most direct and awkward questions" relating to the tariffs effect on prices. BUENKER,supra note 45, at 149.

483. Mowry, supra note 415, at 290.484. William H. Taft (Dec. 6, 1912), in 3 UNION MESSAGES, supra note 303, at 2515.485. BUENKER, supra note 45, at 154. The historic connection between the tariff and the in-

come tax under the compensatory theory explains why the income tax itself was not a major issue,yet the election helped to spur ratification. But see STANLEY, supra note 22, at 216 (suggestingthat the income tax's lack of publicity during the election proves the amendment's merely symbol-ic function).

486. STANLEY, supra note 22, at 225. Philander C. Knox, Taft's Secretary of State, formallycertified the Sixteenth Amendment's adoption on February 25, 1913. RATNER, supra note 108, at324; Roberts & Stratton, supra note 131, at 42-43. It is a bit of a red herring to imply that thetime it took to ratify the amendment is a meaningful gauge of support. See STANLEY, supra note22, at 237. The four-year delay is as much due to the infrequent meetings of the legislatures asanything else. Few legislatures were in session in 1909 after Congress passed its resolution for aconstitutional amendment. The most critical year was 1911, since all but four of the states' legisla-tures had scheduled a session during that year. Emerging from that year lacking only eight states,ratification was again delayed since few states were in session in 1912. Moreover, New Mexicohad only been recently admitted and some states, such as New York and Georgia, voted on the

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claimed that "the way is now open to relieve the overladen shoulders of thepoor and take the tax burdens off the necessaries of life." 7 The New YorkEvening Post predicted that "the prospect of many millions of new revenueshould give the tariff-makers a much freer hand in so readjusting duties as toproduce the greatest possible benefit to the consumer." 8 Perhaps heedingthis advice, newly-elected President Wilson called for the twin reforms oftariff reduction and an income tax during his inaugural address in March,1913.' 9 Within a month, during an emergency session of Congress called toenact Wilson's reforms, House Ways and Means Chair Oscar Underwood (D-Ala.) introduced a tariff reform bill containing an income tax section providingfor explicitly graduated rates. Drafted by Cordell Hull of Tennessee, the pro-posed income tax contained a "normal" rate of 1% on incomes between$4,000 and $20,000, with "surcharges" of 1% on incomes between $20,000and $50,000, 2% on incomes between $50,000 and $100,000, and 3% onincomes greater than $100,000.' 9 Hull and Underwood originally had want-ed to introduce a flat tax to ensure judicial approval, but pressure from otherDemocrats, including future Vice-President John Nance Garner of Texas,forced the Democratic leadership to incorporate the surcharges in the rates.49'

The ensuing debates indicate a battle between the dominant majority es-pousing a proportionate overall tax burden under the compensatory theory, andthe small minority of Progressives and Insurgents advocating a progressiveoverall tax burden under the redistributive rationale. A fundamental misunder-standing of the context and underlying theories in these debates has led ob-servers to suggest that the principle of progression had become accepted bythis point. Sidney Ratner, for example, concluded that "unlike debates in pre-vious years, [the 1913 Act] involved no dispute concerning the desirability ofan income tax or even the principle of progression. The climate of public andcongressional opinion had changed remarkably since 1894 and 1909."Blum and Kalven, perhaps relying upon Ratner, found a similar paucity of

issue more than once. See id. at 211 (table charting the chronology of ratification); BUENKER,supra note 45, at 143-54; RATNER, supra note 108, at 306. Thus, the amendment was actuallyratified after two years of meaningful consideration by the states, a swift response by most mea-sures.

487. STANLEY, supra note 22, at 226.488. Id. (quoting 46 LITERARY DIGEST 325-36 (1913)).489. PAUL, supra note 84, at 101; WITrE, supra note 79, at 76.490. BUENKER, supra note 45, at 368; RATNER, supra note 108, at 326; WITTE, supra note

79, at 76-77. Today, the use of a "surtax" or "surcharge" in place of an explicit rate is often dis-dained because it tends to hide the increase in payments. See Martin J. McMahon, Renewing Pro-gressive Taxation, 60 TAx NoTES 109, 115 n.27 (1993). In 1913, however, the surcharge wasdesigned to ease the administrative burden involved in collecting income taxes "at the source," orbefore money was paid to an individual. Although "stoppage at the source" prevented the problemof self-assessment, and thus improved collections, it created its own difficulties since a companyhad no way of determining a shareholder's rate bracket before making a dividend distribution.Thus, only the "normal" tax was subject to stoppage at the source, while the surcharges werecollected under the traditional system of self-assessment. See WALTMAN, supra note 63, at 29.

491. BUENKER, supra note 45, at 361; PAUL, supra note 84, at 102; RATNER, supra note 108,at 325; WrrrE, supra note 79, at 76. Adolph Sabath, a Chicago Democrat, had introduced a gradu-ated income tax proposal on April 7th, 1913, which never emerged from Committee. 50 CONG.REc. 87 (1913).


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conflict, stating, "Whatever the reasons, it seems that between 1894 and 1913the deadline for sharp political debate over the progression principle hadsomehow passed."'4 93 Ironically, these analyses of the debates have it exactlybackwards. Progressive income taxation in 1913 can only be understood in thecontext of Congress's desire to compensate for a regressive tariff which wasperceived to have manifested itself in higher prices. It was not the principle ofprogression which had become accepted by this point, but the principle of flator proportionate taxation.

The Democrats began the debates under a united front. With evidence ofthe Republican party's disintegration all around them, Democrats hoped toprevent factionalism from interfering with their first opportunity in two de-cades to control both Congress and the Presidency. This was not an insubstan-tial risk. In the Senate their margin was slim, allowing little room for cross-over votes. Democrats had a significant majority in the House, but a largenumber in their ranks were first-termers. Thus, the Democrats chose to ironout all decisions regarding both the tariff and the income tax in a party caucusin which each member pledged to support the party's decisions on thefloor.494 With the battle lines thus drawn, three positions emerged. Insurgentsand Progressives favored significantly graduated rates, often on explicitlyredistributive grounds. Regular Republicans, forced to concede that some formof income tax would be adopted, but unwilling to connect it to the tariff, at-tempted to push for lower exemptions and proportionate taxation so as toprevent it from becoming "class legislation." Finally, Democrats favored amoderately graduated income tax to compensate for the regressivity of con-sumption taxes. Once free trade could be established, however, and consump-tion taxes reduced to a bare minimum, the Democrats were in favor of flat orproportionate income taxation.

Soon after the bill was introduced in the House, the Progressives revealedtheir strategy. Ira C. Copley, a newspaper publisher from Illinois, and one of19 Progressives in the House, proposed an amendment for steeply graduatedsurcharges ranging from 1% on incomes between $10,000 and $15,000 to 68%on incomes exceeding $1 million.495 Copley left little doubt that his underly-

493. BLUM & KALVEN, supra note 33, at 12.494. BUENKER, supra note 45, at 359; see RATNER, supra note 108, at 325, 328. Representa-

tive Rayburn applauded the unity of the Democrats:This bill was submitted to the Democratic caucus, and there every Democrat had achance to have his say and to offer his amendment to the bill. We settled our partydifferences in that caucus and have come into this House and before the country with aunited front, and this seems to pain our Republican brethren keenly, for they know thatevery amendment that they offer will be met with a solid Democratic majority and sentto the scrap heap, where it will justly repose.

50 CONG. REc. 1249 (1913) (Rep. Samuel T. Rayburn) (D-Tex.). Senator Williams observed:This is the first tariff bill in the history of this country where the bill was submitted to afull and free and fair discussion of every one of the dominant party in a free and faircaucus, where every man could be heard and where they merely obeyed the will of theparty.

Id. at 3810 (statement of Sen. Williams).495. 50 CONG. REc. 1246 (1913); RATNER, supra note 108, at 328 n.15.

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ing motivation was to reduce the wealth "that is a menace to the institutions ofthis country":

I have introduced this amendment for several reasons, the principalone being that I believe it to be the best way of equalizing the oppor-tunities which society in this country offers to certain men in securingmore than their fair share of the benefits derived from the labors ofother men.496

Recognizing that his amendment would produce more revenue than the federalgovernment could possibly use, Copley suggested that it be returned to thestates "to be used by them in lightening the burdens of taxation of thepoor." 97 Others followed Copley's lead, albeit with somewhat less radicalproposals. Melville C. Kelly, a Pennsylvania Progressive, proposed to increasethe bill's top effective rate from 4% to 9% on incomes exceeding$100,000." 98 Kansas Insurgent Victor Murdock and Washington ProgressiveJacob Falconer each offered the same amendment as Kelly, but with smallerincreases to 7% and 6% top effective rates respectively.4' Although theseproposals were markedly less drastic than Copley's, they were clearly cut fromthe same cloth. As Representative Murdock explained in introducing his pro-posal, "[T]he great problem remains .... [T]he very rich of this country suc-ceed in doing one thing. They continue to grow richer."5" RepresentativeFalconer concurred, explaining that "a man can not legitimately spend$100,000 a year." '' Each of those proposals, however, was rejected withoutthe taking of any roll-call votes.

The approach of the Standpatters was opposite that of the Progressives.Rather than seeking to raise the top rate, the Standpatters moved to lower thebottom rate. Since they did not concede that the tariff was a tax, RegularRepublicans viewed the income tax as the poor's only contribution to thegovernment. Thus, Frederick H. Gillett, a Republican lawyer from Massachu-setts, proposed to amend the bill by lowering the exemption limit to $1,000 soas to tax those with incomes between $1,000 and $4,000 at 1/2%.2 Accord-ing to Gillett, an income tax would permit "the great mass of the people" to"have a little feeling in their pockets as to whether the Government was eco-nomical or extravagant.""5 3 Representative Foster, among several Democrats"bitterly opposed" to Gillett's proposed amendment,5" immediately contestedthis logic:

496. 50 CONG. REc. 1246 (1913).497. Id.498. Id. at 1251. Kelly was much less obvious than his Progressive colleague. He declared, "I

would not think of attempting to outlaw all the forces which make for inequality of wealth in thisnation." Id.

499. id. at 1252 (Rep. Victor Murdock) (Kan.); id. at 1257 (Rep. Jacob Falconer) (Wash.).500. Id. at 1252.501. Id. at 1257.502. Id. at 1247; RATNER, supra note 108, at 328.503. 50 CONG. REc. 1247 (1913).504. Id. at 1249 (Rep. Hiram R. Fowler) (D-1ll.); see also id. at 1247 (Rayburn); id. at 1250

(Rep. Alexander M. Palmer) (D-Pa.).

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The man of family, whose income is small, has usually paid a con-sumption tax in the way of a tariff, and has contributed his fair shareof taxes to the Government, and now, if his small income is againtaxed, it is more than he should be expected to bear at this time. 5

Representative Clyde H. Tavenner (D-Il1.), responding to the charge of "thestandpatters and protectionists" that the exemption is "class legislation," ar-gued that "the present system of taxing the necessaries of life while permittingwealth to go untaxed is class legislation of the grossest sort."5" Thus,Gillett's proposed amendment was also defeated.

For Democrats, a graduated income tax above a certain amount, and tariffreform on necessities, would together further their goal of proportionate taxa-tion. Tavenner explained that

the income tax is part of the Democratic plan to reduce the ever-increasing cost of living in this country. It means the carrying out ofthe program promised in the pre-election campaign last fall, namely,to take some of the tax off the necessaries of life, such as sugar,woolens, cottons, beef, and lumber, and to make up for the loss ofrevenue thus sustained by the Government by placing a tax uponincomes. 7

Democrat Alexander M. Palmer of Pennsylvania succinctly stated that the rateshad to be graduated as long as the consumption tax was still regressive: "Thepresent consumption taxes bear most heavily upon the poor; it is right that theincome tax should bear most heavily upon the rich."50 8

Eventually, however, Democrats expected that the tariff tax would beremoved altogether. Representative William Murray, an Oklahoma Democrat,predicted that "we are just entering upon a policy for the support of this Gov-ernment which, in a very few years, will be the only method of taxation forthe support of the American Republic, and the days for protective-tariff favor-itism will be over. [Applause on the Democratic side]." 5" At this time, Dem-ocrats agreed, men would be taxed "in accordance with their ability to payinstead of because of their necessity to eat and to wear clothing."50 Becausethe system of property taxation was woefully inadequate to accomplish thisgoal, an income tax was necessary, as "the fairest and cheapest of all taxes, inorder to secure to the largest extent equality of tax burdens, an adjustablesystem of revenue, and in all respects a modernized fiscal system." '' Underthat system, everyone would pay in proportion to his or her respective in-comes.

505. Id. at 1249.506. Id. at 1253.507. Id.508. Id. at 1250; BUENKER, supra note 45, at 366.509. 50 CONG. REC. 1252 (1913); see id. at 1248 (Rep. Samuel Raybum) (D-Tex.) ("[Wlhen

the time comes that money to defray the expenses of the Government can be raised from theincome tax and other legitimate sources of direct taxation, that the tariff should be entirely re-moved and that free trade should come in its stead.").

510. Id. at 1254 (Rep. Clyde Tavenner) (D-Ill.).511. Id. at 1253; BtENKER, supra note 45, at 369.

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In the Senate, Progressives and Insurgents again attempted to increase thegraduation of the rates so as to achieve truly progressive, rather than propor-tional, taxation.5 2 William Borah of Idaho proposed to raise the top effectiverate to 4% on incomes over $100,000.1 3 Joseph Bristow of Kansas proposedto graduate the rates 1% for each $10,000 increase in income to a maximumeffective rate of 11 %.54 Wisconsin's Robert La Follette, a Progressive Partycandidate for President in 1924, also proposed a top effective rate of 11%, butsuggested /2% steps from $10,000 to $40,000.5 ' Finally, Miles Poindexter ofWashington proposed to extend the graduation to 10% on incomes exceeding$500,000, and 20% on incomes exceeding $1 million." 6 While each of theseproposals was rejected by nearly identical votes,5 7 the attempt to persuadethe other senators to accept a somewhat higher graduation was made withgreater effect than in the House. This effect did not seem to be premised,however, on any concession toward adopting the goal of overall progression inthe tax system. Although several Progressives and Insurgents did argue forexplicit progression under rationales other than compensation, their argumentswere fiercely opposed. Senator Poindexter argued that great wealth must betaxed at a high rate under both the benefit and sacrifice theories-that thewealth was accumulated through "special privileges" and government benefits,and that "luxuries should be taxed more heavily than necessities; that super-fluity should bear a heavier portion of the burdens of the Government thanmere sufficiency." 5 Senator John D. Works, a California Insurgent, boldlyasserted that this great wealth had become "a positive burden to them ratherthan a benefit," suggesting that more steeply graduated rates would be "doingthem a favor rather than an injury."5 9 Senator La Follette, pointing out thatmost people accepted a graduated inheritance tax, asked, "instead of awaitingthe opportunity to reach after death that great accumulation of wealth whichthe Senator has admitted is a menace, why not diminish it by a system oftaxation that is constitutional, legitimate and proper?""5 This latter argument

512. A few changes were made to the House bill by the Senate Finance Committee beforeintroducing it on the floor for consideration by the entire chamber. The exemption was reduced to$3,000 for single persons while allowing $4,000 for married couples. The committee, after "coun-trywide protest," also exempted mutual life insurance companies from taxation. See BUENKER,supra note 45, at 370; RATNER, supra note 108, at 329.

513. 50 CONG. REC. 3771 (1913).514. Id. at 3805.515. Id. at 3819; see KEY, supra note 363, at 172 (Table 7.1).516. 50 CONG. REC. 3835 (1913).517. Borah's amendment was defeated 47-17. Id. at 3773. Bristow's was defeated 46-16. Id.

at 3818. La Follette's was defeated 43-17. Id. at 3830. Poindexter's was defeated 41-12. Id. at3836.

518. Id. at 3835, 4613.519. Id. at 3812.520. Id. at 3821. La Follette conveniently ignores that this same distinction was made in his

own state of Wisconsin, which is credited as one of the models for the 1913 income tax provi-sions. Joseph Ranney, in surveying the debate in Wisconsin over the two measures, noted that

[mlany supporters of property tax reform and of an income tax viewed their causesprimarily as a means of distributing the obligation to support the government fairlyamong all classes of people. Supporters of the inheritance tax went a step further, andexplicitly promoted their tax as a means of redistributing wealth from the rich to theremainder of the population.

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finally provoked a heated response from Senator John Sharp Williams of Mis-sissippi, appointed by the caucus to be one of two Democratic defenders of theincome tax section in the Senate. 2

No honest man can make war upon great fortunes per se. The Demo-cratic Party never has done it; and when the Democratic Party beginsto do it, it will cease to be the Democratic Party and become thesocialistic party of the United States; or, better expressed, the com-munistic party, or quasi communistic party, of the United States ... Iam not going to attempt to make this tariff bill a great panacea for allthe inequalities of fortune existing in this country; nor would it doany good if we did, because we would be doctoring the symptomsand not the cause of the disease. 22

If there was any doubt as to Williams' rejection of the redistributive rationale,he resolved them by declaring, "The object of taxation is not to leave menwith equal incomes after you have taxed them." '523

Progressives and Insurgents did make headway on their quest for steepergraduation, however, when they expressed their sentiments in terms of thecompensatory theory. Senator La Follette, in introducing his proposed amend-ment, commented on the experience of Wisconsin and its income tax lawenacted only two years earlier. He recounted the stories of individuals whohad sworn that their income from personal property such as investments wasno more than $5,000, when later investigation revealed incomes between$300,000 and $1 million.524 Senator Borah remarked that this supported anargument he had voiced earlier, namely that "in order to reach proportionatelythe large incomes it is absolutely necessary that an almost exaggerated rate beput upon them because they do escape taxation." '525 This was a justificationfor graduated rates to which Williams had expressed his agreement:

Ranney, supra note 468, at 22. For a discussion of the possible causes for this distinction, seesupra note 20.

521. The other was William Hughes of New Jersey, the leader of a group opposed to manda-tory adherence to measures emerging from the caucus. RATNER, supra note 108, at 330. Williamswas often thought of as a conservative Southern Democrat. See KOENIG, supra note 315, at 415(grouping Williams with a number of southern Democrats who were against Bryan and in favor ofWilson); RATNER, supra note 108, at 331. However, his credentials on the income tax were im-pressive. According to Williams, he voted for the income tax in 1894 and introduced a joint reso-lution proposing an amendment to the Constitution to permit an income tax during each of hissubsequent years in the House. 50 CONG. REc. 3821 (1913).

522. 50 CONG. REC. 3821 (1913). Williams issued a similar response to Senator Bristow'sproposed amendment: "The motive behind the amendment offered by the Senator from Kansas isnot revenue. It is a punitive, vindictive motive. It is to punish and take from those who have largeincomes, not because the Government needs the money, but because the Government has thepower to do it." Id. at 3806.

523. Id. at 3807.524. Id. at 3820.525. Id. The previous day, Borah had remarked:

[WIe ought to bear in mind that which is proven to be well founded in experience, andthat is that the man with a small income always pays more completely upon his incomethan the man with a large income .... Therefore, if we are going to reach proportion-ately the men with large incomes, it seems to me we must raise the grade of taxationmore than is here specified.

Id. at 3771.

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So this is a graded income tax, and it does attempt to equalize thingswith a view to correcting what the Senator from Idaho [Mr. Borah]referred to yesterday, and which is absolutely true-the greater oppor-tunity of men of greater income, whose incomes are generally drawnfrom bonds, stocks, bills receivable, and various things of that sort, tohide their incomes, as compared with the ordinary man, whoseproperty is in a visible shape and form, and whose income is knownto all his neighbors.526

Williams explained:During times of peace, you have a slight tax upon incomes, graduatednot with a view of punishing those who have large incomes, but witha view of equalizing the taxes, because of the greater opportunitiesthat people of large incomes have to escape taxation than people ofsmall incomes have.52

Thus, La Follette pleaded with Democrats to "take this provision of the billand the amendment which I have offered back to their committee room andgive it consideration, to the end that these enormous incomes may be com-pelled at last to pay the tax they have heretofore evaded. ' '5 28

La Follette's arguments did not fall upon deaf ears. The strength of theDemocratic caucus in the Senate had been weakened from the beginning whensix senators, led by William Hughes, announced they were opposed to beingbound to support the measure as drafted. 29 One of these upstarts, SenatorJames K. Vardaman (D-Miss.), precipitated a mini-revolt by voting for LaFollette's proposed amendment. Three Democrats announced the next day thatthey had withheld their votes on La Follette's amendment in the expectationthat the Finance Committee would agree to raise its rates." The Democraticcaucus reconvened and reached a compromise which added three brackets sothat the rates rose to 3% on incomes over $75,000, 4% on incomes over$100,000, 5% on incomes over $250,000, and a top rate of 6% on incomesover $500,000. 3 This was clearly not a victory for explicit progression,however, as the rates were much lower than those advocated by the Progres-sives and Insurgents, or even the radical Democrats. Furthermore, later propos-als by Bristow, La Follette, and Poindexter to increase the rate of graduationon redistributive grounds were soundly defeated.5"

526. Id. at 3807.527. Id. at 3806.528. Id. at 3821.529. BUENKER, supra note 45, at 371; RATNER, supra note 108, at 330 n.24.530. The three were Senators Eugene Reed of New Hampshire, William Thompson of Kansas,

and Henry Ashurst of Arizona. BUENKER, supra note 45, at 374; RATNER, supra note 108, at 332n.3 1.

531. See CONG. REC. 4611 (1913) (Sen. Joseph Little Bristow) (R-N.Y.) (explaining the Sen-ate Finance Committee's amendments to the bill); RATNER, supra note 108, at 332; WrrE, supranote 79, at 78.

532. 50 CONG. REc. 4611 (1913) (Sen. Bristow); id. at 4612 (Sen. La Follette); id. at 4613(Sen. Poindexter).

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Meanwhile, Regular Republicans proceeded much as they had in theHouse. Although they believed that a protective tariff created rather than re-duced income, they conceded defeat on this point.533 On the question of theincome tax, they clearly "prefer[red] that all pay proportionately and that noclass be introduced."5"4 Absent that, they sought a lower exemption becauseof the "danger to the Republic" '535 when Government is only supported by afew. Michigan Senator Charles E. Townsend pleaded, "Increase the rate if youwish on the larger incomes, but make the class of men who pay the tax aslarge as you can."536 He proposed to lower the effective rate to /% on allincomes regardless of how small.537 Porter McCumber of North Dakota andElihu Root of New York both proposed to lower the exemption to $1,000,McCumber starting at the minuscule rate of one-tenth of 1%.538 In all cases,however, these proposals were rejected. As Senator Borah explained, "So longas we have the mixed system of indirect taxation and the direct tax," we neednot be concerned about those below the exemption not paying their fairshare.

539

Ultimately, the view which prevailed supported the overall goal of flat orproportionate income taxation. This understanding is best illustrated by anexchange between Regular Republican Henry Cabot Lodge, Progressive Wil-liam Borah, and Democrat John Sharp Williams. Lodge argued that a highexemption was "vicious in principle" since it meant that not everyone paid hisshare of taxes.5"° Thus, Lodge argued, "I would not set a class apart and saythey are to be pillaged, their property is to be confiscated."54' Borah, usingquotations from Seligman's The Income Tax to bolster his point, argued that"so long as we raise seven-eighths of our revenue by another method and onlyone-eighth by direct taxation, it can not be said that any man is escaping taxa-tion." '542 Thus, Borah concluded, "When we shall adopt a system of directtaxation, exclusively and alone, I will join the Senator from Massachusetts inputting the exemptions down to a very low figure." '543 Williams then enteredthe fray to resolve what he termed "a purely academical discussion." 5" Heexplained in no uncertain terms that when the country no longer relied uponconsumption taxes for its revenue, the government would embark upon flat orproportional income taxation with no exemption at all:

There may be great merit in the argument of the Senator from Massa-chusetts some of these days, but not now. The reason why there isnot great merit in it now is because while it taxes these people with

533. Id at 3811 (Sen. Townsend) (R-Mich.).534. Id. at 3801 (Sen. Lawrence Y. Sherman) (R-111.); see id. at 3810 (Sen. Townsend); id. at

3834 (Sen. Porter McCumber) (R-N.D.).535. Id. at 3810 (Sen. Townsend).536. Id. at 3811.537. Id. at 4067.538. Id. at 3834 (Sen. Porter McCumber) (R-N.D.); id. at 4067-68 (Sen. Elihu Root) (R-N.Y.).539. Id. at 3835.540. Id. at 3839.541. Id. at 3840.542. Id. at 3841.543. Id.544. Id.

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indirect taxes of various sorts these things should be left for someday, when the good day comes-the golden day-when there will beno taxes upon consumption at all except upon whisky and tobaccoand wine and beer and things that are considered harmful, and noimport duties at all except countervailing duties to offset them, andwhen everybody will pay in proportion to his income.545

Lest anyone misunderstand what he meant by that final phrase, Williamsoffered an example of the relative tax burdens under a proportionate incometax of 1%:

It might then be well to reduce the exemption or to do away with it,so that a man with $5,000 would pay his $50, or whatever it was, andthe man with $500 would pay his $5, and the man with $50 wouldpay his 5 cents, and the man who got but 5 cents would pay his 1cent, and call it the people's pence, like Peter's pence, and let every-body pay his share."

Thus, when Democrats used the term "ability to pay," they were not referringto an equality of sacrifice sometimes used to justify steeply graduated rates.Instead, they were discussing the expected transition from a system whereconsumption taxes accounted for all the revenues to one where taxes roseproportionately, not progressively, according to income."

When the Underwood/Simmons Tariff Act went into effect on October 3,1913, the Democrats were true to their word in pushing for gradual but signifi-cant reductions in the customs duties. Average rates were reduced from 40%to 28% with ad valorem rates lowered from 18.5% to 9.7%.5" Similarly, theincome tax compensated for the consumption taxes which remained, but didnot attempt to change the distribution of wealth. As John Buenker concluded,"the original income tax was designed to promote tax equity and to produceadditional revenues to allow for tariff reduction, not to redistribute wealth orincome."" Consistent with this view, the Supreme Court, in Brushaber v.Union Pacific R.R. Co.,55 upheld the tax without being asked to decidewhether a redistributive tax scheme was constitutional.55" '

545. Id. As Williams had previously explained to Borah, the Democrats had not already donethis because "you can not all at once remove all taxes upon consumption" where a "false andartificial fiscal system exists." Id. at 3808.

546. Id. Although the lowest figure in Williams's example amounts to a 20% rate, his refer-ence to a "Peter's pence" indicates an intention to refer to the smallest monetary denominationfeasible under that income. The phrase, derived from the notion of giving to the Church, is de-signed to indicate that each person should contribute what he or she is able.

547. Id. at 3772 (Sen. Williams) ("The time may come, and I hope will come some day, whenall taxes for the Government will be raised by taxing the citizens in proportion to their ability topay.").

548. BENDER'S FEDERAL REVENUE LAW, supra note 85, at 397.549. BUENKER, supra note 45, at 396-97.550. 240 U.S. 1 (1916).551. Brushaber, 240 U.S. at 24-25. The Court merely decided, based on the country's prior

experience with progressive income and inheritance tax rates, that it did not "transcend the con-ception of all taxation" so as "to be a mere arbitrary abuse of power which must be treated aswanting in due process." Id. at 25. At least one commentator criticized the decision. See Frank W.Hackett, The Constitutionality of the Graduated Income Tax Law, 25 YALE L.J. 427 (1916).

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Although the 1913 Act instituted only mildly progressive income tax rates,it was still a significantly "progressive" reform. It was a step toward remedy-ing an imbalance in taxation which had favored the wealthy. The period be-tween the Civil War and the adoption of the Sixteenth Amendment washighlighted by a change in the form of wealth from real property, such as landand buildings, to intangible wealth, such as stocks and bonds. Combined withthe advent of protectionism as a national policy, the poor began to view them-selves as increasingly burdened by taxation while the growing fortunes of therich largely escaped the supposedly compensatory measure of property taxa-tion. This inequity sparked pro-income tax movements during periods of eco-nomic crisis. The resort to an income tax, however, was not designed to ad-dress the concentration of wealth itself, or even to protect the nation frominstability in protest against the concentration of wealth. Instead, the incometax, with its progressive features, was adopted "to redress the inequity of taxa-tion which was the predominant feature of the American fiscal system as awhole." '52 Thus, the history of income taxation in this country before andimmediately after the ratification of the Sixteenth Amendment describes anessentially successful transformation from a regressive consumption tax-basedsystem to a proportional or flat tax-based system.

IV. TRANSLATING 1913 INTO TODAY'S DEBATE

An understanding that the Sixteenth Amendment was ratified against thebackdrop of a half-century's push toward proportionate taxation is extremelyinstructive for modem efforts to reform the tax system. In one sense, it under-mines the notion that there is authority under the Sixteenth Amendment for anexplicitly redistributive tax system, and leads to the question of why "progres-sion today is immune from constitutional attack."5"3 In a broader and morepractical sense, however, the history is instructive for the lessons it provides.The current debate has directed little attention toward the overall tax burden inAmerican society. 54 It may be that, unwittingly, we have remained faithful

Hackett relied to some extent, however, upon In re Cope's Estate, 43 A. 79 (Pa. 1899), a stateinheritance tax case. It is not difficult to understand how the Court concluded that the progressionwas not completely arbitrary given Congress's compensatory rationale. On the other hand, it mighthave been a closer call if Congress had adopted Representative Copley's proposed 68% top ratebased upon an explicitly redistributive rationale.

552. SELIGMAN, supra note 30, at 676.553. BLUM & KALVEN, supra note 33, at 10. Blum and Kalven's statement is as true now as

it was when written in 1952. See, e.g., Thomas C. Grey, The Malthusian Constitution, 41 U. MI-AMI L. REV. 21, 23 (1986) (reviewing Richard Epstein's Takings and suggesting that the SixteenthAmendment "prevents a responsible court from demanding that Congress not increase the levels ofprogressivity in future years"); Joseph L. Sax, Takings, 53 U. CHI. L. REV. 279, 281 n.10 (1986)(reviewing RICHARD A. EPSTEIN, TAKINGS: PRIVATE PROPERTY AND THE POWER OF EMINENTDOMAIN (1985)) (contending that the Sixteenth Amendment sanctioned progressivity in the taxsystem).

554. The attention directed toward the effects of other taxes in the system has come onlyrecently and from relatively obscure sources. See Mark Adkins, Letter to the Editor, Superrich Al-ready Enjoy Comprehensive Federal Flat Tax, ARIz. REPUBLIC, Aug. 4, 1995, at B8; Norman J.Omstein, Congress Inside Out Taxing Thoughts on Reform: It's Not Just About Income, ROLLCALL, Aug. 7, 1995, available on LEXIS, Nexis Library, CURNWS file. Few politicians haverecognized this aspect of the debate.

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to the original understanding of an equitable overall tax system based on flator proportional rates. It also may be, however, that current proposals' empha-sis on taxation of consumption, rather than savings and investment income, isa recipe for a repeat of the conditions leading up to the adoption of the Six-teenth Amendment. This is surely avoidable, but it has not received the focusit deserves to this point. Ultimately, no matter how consistent the theory of aflat tax is with our early history of taxation, the current debate should not bedivorced from the considerations underlying that early history of taxation,including the existence of multiple points of taxation and sources of wealth.

In 1913, customs duties supplied 47% of federal tax revenues, excisetaxes supplied 46%, and income taxes provided only 2%."' Thus, consump-tion taxes accounted for over 90% of total federal revenues. Currently, lessthan 5% of federal revenues come from excise taxes, and revenue from cus-toms duties is minuscule.556 While there have been some recent efforts byboth Bush and Clinton to tap into these sources, their overall effect has beennegligible.557 Even when state and local taxes are included in the mix, con-sumption taxes still account for only 17% of all government revenues.558

This does not mean, however, that income taxes are the only form of taxationwhich need concern us.

Federal revenue sources in addition to the income tax, excise tax, andcustoms duties include the corporate income tax, estate and gift taxes, "mis-cellaneous receipts," and the all-important payroll taxes for social security andmedicare.55 9 First established in 1935 as part of the Social Security Act, pay-roll taxes now account for an increasing percentage of an individual's incomeand have been politically insulated from attack. The social security tax rate of3% in 1950 has increased over five-fold to the 15.3% rate we have today."WSince payroll taxes are assuredly not progressive, they can alter the overallcharacter of the federal revenue system.56" ' The generous exemptions pro-posed by many flat tax plans appear to provide a means of compensating forthis regression, but, as yet, no one has attempted to explicitly justify the exis-tence or size of the exemptions on these grounds.

Thus, if our concern is fairness, any attempt to achieve flat or proportion-ate taxation must take into account these other revenue sources.562 Over the

555. RATNER ET AL., supra note 70, at 516, 518.556. Hearings, supra note 38 (statement of Michael I. Graetz, Professor of Law, Yale Univer-

sity). In 1976, around 6% of federal revenues came from excise taxes and less than 1% came fromcustoms duties. RATNER ET AL., supra note 70, at 516.

557. See John Lee, "Death and Taxes" and Hypocrisy, 60 TAx NOTEs 1393, 1399 (1993).558. Hearings, supra note 38.559. Scott Bums, U.S. System Taxes Our Patience, DALLAS MORNING NEWS, July 9, 1995, at

12H.560. Gene Steuerle, Can Flat Taxes Be Progressive?, 68 TAx NOTES 887 (1995).561. RATNER ET AL., supra note 70, at 517; Gene Steuerle, Postwar Changes in the Overall

Tax System, 54 TAx NOTES 1163, 1164 (1992) [hereinafter Steuerle, Postwar Changes]; GeneSteuerle, The Debate over Tax Progressivity, 47 TAX NOTES 865, 866 (1990); see also Bums,supra note 559, at 12H. Payroll taxes take 15.3% of an individual's wages. Id.

562. 1 qualify this statement because there are certainly economic reasons why income taxesmay be more worrisome than other taxes due to their visibility, influence on economic decisions,and other factors.

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years, several studies have concluded that our overall tax system, including allgovernment revenues, is proportionate. Blum and Kalven cite a 1948 studywhich found that the overall tax system was proportionate, with only a mildelement of progression at the upper end.563 More recent studies have come tosimilar conclusions."6 These studies suggest that the progression in our in-come taxes compensates for regression elsewhere, just as it did in 1913. Socialsecurity taxes are certainly one possible target of compensation, since they areconsidered "ultra-regressive" given their proportional levy up to a $61,200ceiling of income.56

We should not be quick, though, to write off tax reform based on esti-mates of the current distribution of tax burdens. The estimates' usefulnessdepends upon our assumptions regarding the direction of a particular tax bur-den, and our understanding of the appropriate tax universe against which tomeasure an income tax's effects. Payroll taxes, for instance, ostensibly fundprogressive redistributive programs. Perhaps these taxes should be subtractedfrom the mix altogether in calculating the overall tax burden."6 Furthermore,state sales taxes, which have traditionally been thought to inject a significantdegree of regressivity into the overall system, 67 have recently been to belooked at more favorably. General sales taxes often exempt consumptiongoods and thus have a more progressive effect, according to some studies."6

It may also be useful to consider state and local taxes separately. State andlocal governments used to rely almost exclusively on property taxation andeach unit of government-federal, state, or local-was seen as occupying itsown sphere of taxation. It was often said that the federal government agreed toapportion its direct taxation as part of its deal with the states to acquire exclu-sive rights for control of customs duties, a major source of indirect taxa-tion." In such a compartmentalized tax universe, it was appropriate to con-sider all units of government together in determining the overall tax burden.Today, however, most states have adopted some form of income tax, and itmay be valuable to consider whether each governmental unit should be evalu-ated separately in determining the proper distribution of tax burdens.57 Thus,

563. BLUM & KALVEN, supra note 33, at 5 n.1 I (citing R.A. Musgrave et al., Distribution ofTax Payments by Income Groups: A Case Study for 1948, 4 NAT'L TAx J. 1, 28 (1951)). Anotherstudy cited by Blum and Kalven, however, found that the tax system was "highly progressive"during the same year. Id. at 5 n.12 (citing Rufus S. Tucker, Distribution of Tax Burdens in 1948,4 NAT'L TAX J. 269, 283 (1951)).

564. DAVID F. BRADFORD, UNTANGLING THE INCOME TAX 139-41 (1986) (citing a study byJoseph Pechman); see Allen D. Manvel, The Pre-Reform Pattern of Tax Burdens for U.S. Fami-lies, 35 TAx NOTES 805, 807 (1987).

565. BRADFORD, supra note 564, at 141; Jacob Weisberg, Flat-Tax Fever, N.Y. MAG., May 1,1995, at 22.

566. Andrew J. Hoerner, Economists Examine Whether Progressivity Has Regressed, 56 TAXNOTES 1520 (1992); Steurele, supra note 560, at 888 ("Even a tax with declining rates-for in-stance, the U.S. social security tax that eventually imposes a zero rate on earnings above a maxi-mum tax base-can be progressives if on net there is redistribution to lower-income individuals.").

567. See e.g., Manvel, supra note 564, at 807.568. Hoerner, supra note 566, at 1522.569. See, e.g., 26 CONG. REC. 6694 (1894) (Sen. Sherman).570. PENNIMAN, supra note 375, at 8-9; RATNER ET AL., supra note 70, at 517; Steuerle,

Postwar Changes, supra note 561, at 1164. Dan R. Bucks, executive director of the Multistate

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more study is required on the overall distribution of tax burdens in our taxsystem. We may have a proportionate system by accident rather than design.An explicit recognition of this goal might allow us to pursue more efficientmethods of achieving it.

Even if a flat or proportionate income tax should be a part of the overallmix of revenue sources, its viability still depends upon what is taxed. Most ofthe recent proposals, which are essentially variants on the "consumption" taxtheme, exempt savings and investment income entirely.57" ' Some suggest thatsuch a tax system rewards the rich over the poor and thus "fail[s] the 'snifftest' of fairness for those who do not receive that sort of income. ' As dis-cussed earlier, the exemption of the rich through the nontaxation of investmentincome was a significant impetus to reform in both 1894 and 1913. Wealthyindividuals were able to live off their investments and contribute almost noth-ing toward the expense of the government. It is little wonder that opponents ofthe current tax reform plans are conjuring up images of the Gilded Age in anattempt to demonstrate the plans' favoritism toward the rich. One commentatorwarns that the status quo's complexity is "a reasonable cost to retrieve thefinancial destiny of the nation from the voracious greed of the robber barons.Since Teddy Roosevelt, those policies have generally produced unparalleledeconomic vitality and a more equitable distribution of that prosperity for theAmerican people." '73 Richard Gephardt argues that his five-rate income tax

Tax Commission, warned that state income tax systems are so dependent upon the national in-come tax that efforts to abolish or abandon the national tax would require similar action at thestate level. MTC Urges Congress to Consider Impact of Tax Reform on States, DAILY REPORTFOR ExEcunrvEs, July 31, 1995, at G146. Thus, it may be impossible to separate state and federaltax systems in considering the overall distribution of tax burdens under present and future plans.

571. Susan Dentzer, Trial Balloons on Tax Reform, U.S. NEWS & WORLD REP., July 31,1995, at 43. Michael Graetz pointed out in his testimony before the Senate Committee on Financethat although flat tax proposals characterize themselves as "income" taxes, they are generally"wage" taxes which only tax the amount people consume and not the amount they save. Hearings,supra note 38.

The exemption for investment and savings income is designed to bolster the U.S.'s anemicsavings rate. While "economists disagree as to whether in fact an income tax does discouragesaving," and "a consumption-based tax would not necessarily eliminate all distortions in favor ofconsumption," politicians have latched on to tax reform as a solution to the perceived problem.JOINT COMMITEE ON TAXATION, supra note 1, at 5.

572. John Godfrey, Flat Tax Backers Stress Simplicity, but Devil Remains in the Details, 67TAX NOTES 167, 168 (1995) (quoting University of Michigan economist Joel Slemrod). Some ofthe more vocal opponents to the flat tax have highlighted this problem in writing to area newspa-pers. See S.E. Clarke, Exploding Myths of Flat-Tax Proposals, L.A. TIMES, July 30, 1995, at D6;Austin M. Wright, Flat Tax Proposal Another Giveaway to the Wealthy, CIN. ENQUIRER, Aug. 7,1995, at Al 1; see also Tony Barga, Flat Tax Sets Up the Middle Class, CIN. ENQUIRER, July 26,1995, at A9 (arguing that if double taxation of investment income is a problem, the solution is toeliminate taxation at the corporate level and make sure "we tax all income when it reaches thepocket of a human being").

Even graduated consumption tax proposals such as the Domenici-Nunn USA tax do notsolve this real or perceived inequity. Joseph lsenbergh explains that, no matter how steeply gradu-ated the rates, a graduated tax on consumed incomes would never reach the unconsumed income.Since we value wealth even before it is consumed, this creates the appearance that the wealthy areevading taxes altogether, especially, as Isenbergh graphically illustrates, "when the wealth takesthe form of ancestral manors and old master paintings that produce a stream of imputed income."Joseph lsenbergh, The End of Income Taxation, 45 TAX L. REV. 283, 349, 354 (1990).

573. Tommy Denton, Let's Be Fair, BALTIMORE SUN, July 19, 1995, at 15A.

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proposal "is an effort to defend working families and the middle class againstthe greatest, most regressive redistribution of income since the days of theRobber Barons-the Armey 17 percent flat tax.""' Several commentatorspredict that the exemption of investment income from taxation will be thepolitical undoing of the various proposals.575 The potential rejection of thisprovision of current proposals, however, does not mean that the concept of aflat income tax is impossible. A "pure, unamended" flat tax applies to allincome, including investment income.576 Moreover, some observers recom-mend combining a value-added tax with a broad-based income tax to encour-age savings and investment while maintaining the kind of vertical equity that aflat or proportionate tax system is geared to provide. 77 Coupling a consump-tion tax with healthy rebates for lower-income individuals could also conceiv-ably preserve an exemption for investment income.

Moving toward a goal of flat or proportionate taxation in our revenuesystem should not be confused with rejecting the notion of progressivity itself.Robert Eisner proposes a tax system which would include investment incomeand expand credits and subsidies for earned income, health care, education,research, and owner-occupied housing, resulting in what he calls "a reallyprogressive 'flat tax."'578 Others, perhaps more genuinely concerned with thereputed gains in efficiency from radical reform, advocate a flat tax with pro-gressive credits for lower-income individuals.579 The point is that the tax sys-tem should have little to do with the welfare system or the safety net enactedduring the New Deal. Taxes should redistribute money from the private sector

574. Letter to the Editor, The Rich Should Pay Plenty, WASH. POST, July 22, 1995, at A20(responding to James Glassman, The Rich Already Pay Plenty, WASH. POST, July 11, 1995, atA17).

575. See Robert Kuttner, Dueling Tax Plans: One Adds Up, the Other Doesn't, Bus. WK.,May 15, 1995, at 28; What Should Be Taxed Will Be the Key Issue, WALL ST. J., May 1, 1995, atAl. The public's disgruntlement with the evasion of taxes by the wealthy was not limited to theturn of the century. Michael Graetz testified that he "remember[ed] well the outrage generated in1969 by Treasury Secretary Joe Barr's revelation that 154 people that year had more than$200,000 in adjusted gross income and paid no taxes, the beating taken by Mrs. Dodge, in particu-lar, who had $1 million of tax-exempt interest and no tax liability." Graetz also recalled "the ex-pressions of outrage generated in 1986 when the laborers on General Electric's assembly line paidmore taxes than the company." Hearings, supra note 38.

576. Editorial, Reformers Really Want a Flat Tax with Wrinkles, PALM BEACH POST, July 15,1995, at 14A; Howard Gleckrnan, Tax Reform Is Coming, Sure. But What Kind?, Bus. WK., June12, 1995, at 84.

577. Supporters of this idea include Yale Law professor Michael Graetz, former TreasurySecretary Nicholas Brady, and former Senators Danforth and Boren. See Hearings, supra note 38;Edward J. McCaffrey, Tax Policy Under a Hybrid Income-Consumption Tax, 70 TEx. L. REV.1145, 1148 (1992). Isenbergh advocates a similar approach designed to achieve progressivity, buthis approach is easily modified to approximate proportionate taxation and his commitment toprogressive rates is merely a concession to the political popularity of the concept. Isenbergh, supranote 572, at 350. Ironically, this solution essentially replicates the hybrid consumption-income taxsystem instituted in 1913.

Vertical equity represents the notion that taxpayers with larger amounts of income shouldcontribute larger amounts of tax. Jay M. Howard, 32 WASHBURN L.J. 43 (1992). These amountscould be proportionately or progressively larger depending upon the goals of the overall tax sys-tem.

.578. Robert Eisner, Make Taxes Fair, Not Flat, WALL ST. J., Apr. 11, 1995, at A20.579. See Bankman and Griffith, supra note 34, at 1966; Howard J. Gensler, The Secret His-

tory of the U.S. Flat Tax, 56 TAx NOTES 1657 (1992).

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to the public sector, "the government can then spend the money as progres-sively as it wants." ' As Charles Galvin points out, many "institutional ar-rangements" in our society redistribute wealth much more effectively than thetax system."8 '

CONCLUSION

John Sharp Williams declared in 1913 that advocates of a tax systemgeared toward progression and redistribution "are always considering some-thing in a tax besides the tax; something in a tax besides the revenue. '5 82

This observation still holds true today. The current system is encrusted withthe conflicting social goals of generations of policymakers. Moreover, the totaltax burden has been affected in ways which may be contrary to the announcedintentions of Congressional enactments. Proponents of radical tax reformshould now strive to ensure, as their intellectual forefathers did from the CivilWar through the ratification of the Sixteenth Amendment, that the tax systemdoes not introduce its own inequities into the system while raising sufficientrevenue to operate the government. That goal is difficult enough.

580. Should America Keep Its "Progressive" Tax System?, INVESTOR'S BUS. DAILY, July 24,1995, at B I (quoting economist Arthur Laffer).

581. Charles 0. Galvin, Would Haig-Simons Plus a Flat Tax Be the Best U.S. Tax System?,60 TAX NOTES 540 (1993).

582. 50 CONG. REC. 3821 (1913).

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